Dividend Income and the Dogs of the Dow

By Dian Vujovich

Income is every investor’s dream no matter where it comes from—a rise in a stock price and hence money made when shares are sold. Or better yet, dividend income. And to that end, the 2010 Dogs of the Dow look pretty interesting. Particularly since savings and money market accounts offer such puny returns these days.

I realize I’m a few weeks late in getting this news out, but look at it like this— half of the 10 dogs have per share prices that are lower now (based on Feb. 16th closing prices) than they were at year-end 2009. And given that this theory is as much about high-dividend paying stocks as it is anything else, I figure being tardy isn’t so bad.

Lest you’ve forgotten, the Dogs of the Dow represent the 10 highest yielding stocks in the Dow Jones Industrial Average on the last trading day of a year.
The theory behind buying this investment strategy is that dividends are considered more stable than a stock’s price. And, that a high dividend is an indication that a stock’s price has neared a low and is due for a rebound.

To play the Dog game, investors are to purchase equal shares of all 10 stocks at the beginning of the year and then hold them for the entire year.

While the theory sounds good, it doesn’t always pay off. CNBC reported that in 2009, the Dogs were up 14 percent while the Dow was up almost 20 percent; in 2008 the Dogs were down an average of 41 percent while the Dow was off 34 percent. Another source reported that the strategy has only proved to be a winning one once in the last five years.

But I say if you’re looking for income, so what. In this market of whirling fluctuations and low bond yields, dividend income looks pretty tempting. After all, income is income no matter where it comes from.

This year’s 10 Dogs of the Dow listed here based on those with the highest yields as of 12/31/09 are: AT&T (T); Verizon (VZ); DuPont (DD); Kraft (KFT); Merck (MRK); Chevron (CVX); McDonald’s (MCD); Pfizer (PFE); Home Depot (HD) and Boeing (BA).

The two highest yielding Dogs as of February 12 were AT&T and Verizon both with yields over 6 percent according to Dogsofthedow.com. The two lowest yielding ones, Home Depot and its 3.1 percent yield and Boeing’s yield of 2.82 percent.