This month's lackluster news on the economy has made it likely that the Federal Reserve will keep interest rates -- and bond yields -- near their current rock-bottom lows. So some income-seeking investors are taking a fresh look at a familiar strategy: buying the high-dividend "Dogs of the Dow."
The strategy, first popularized in the early 1990s, involves investing in the 10 stocks of the Dow Jones Industrial Average that offer the highest dividend yields at the end of each year. Investors who follow the strategy to the letter split their money equally among these 10 Dogs as the next year begins, but other money managers buy the stocks without strictly observing that timing.
This year, the 10 stocks that had the highest yields on December 31, 2011, have returned 14%, after dividends, versus 10% for the broader Dow; they boast average yields of 3.65%, more than double the yield on a 10-year Treasury note.
The strategy "works so well because it doesn't take into account your personal feelings," said Brian Peery, co-manager of the Hennessy Total Return fund, which invests three-quarters of its assets in the Dogs.
Dividend stocks in general have grown more popular among defensive investors, but advocates say the Dogs have some additional advantages. Mag Black-Scott, president of Beverly Hills Wealth Management, says most Dogs are stable blue-chip companies that tend to be less volatile than other stocks -- this year's kennel includes household names like AT&T (T) Inc.
Some managers are concerned that too many investors already have joined the pack, making the stocks expensive. The broader market currently trades at an average of 12 times next year's expected earnings. Six of the 10 Dogs have higher valuations, including Verizon (VZ)
The possibility of a tax increase on dividend income is another looming concern for some. Tom Forester, chief investment officer of Forester Capital Management in Lake Forest, Ill., rates the stocks a "hold" and says that he "wouldn't be backing up the truck" to buy at current prices.
With similar concerns in mind, some investors are approaching the Dogs more selectively. Pharmaceutical companies Pfizer (pfe) Inc.