Is "Dogs of the Dow" a Good Bet for Beginner Investors?

A reader wants to know whether buying the so-called Dogs of the Dow is a good way to get started investing in the stock market. Investment experts say the Dogs' track record is good -- as long as you're in it for the long haul.

Q: Is buying the “Dogs of the Dow” a good way to get started investing in the stock market?A: As the end of the year gets closer, many investors like yourself take a look at the "Dogs of the Dow" investment theory. According to proponents of this 20-year-old method, you can often beat the market by investing in the Dogs of the Dow at year-end and holding the stock for a year.

The Dow Dogs are the 10 stocks in the Dow Jones Industrial Average that have the highest dividend yields in late December. To get in on the Dow Dogs action, you simply put an equal dollar amount into each of these stocks and hang on to them for a year. In late December the following year, you sell any stocks that aren’t on next years’ Dogs list and buy any newly added Dogs. Then you continue to do the same every year thereafter.

The track record for the Dogs theory is fairly good, as they have outperformed the Dow industrial average in most years. Investment analysts caution, however, that the Dogs theory is a long-term strategy. In some years, the Dogs may lag the market averages.

Experts also point out that the Dogs seem to do best when the economy is in slow-growth mode. Investors who are looking for a robust economic recovery in 2011 might want to think twice before putting the Dogs theory into practice. If you look for continued slow expansion, on the other hand, the Dogs may have a better chance of making you a winner.

Market mavens offer different reasons why the Dogs of the Dow theory works. One answer is that the Dogs represent solid, old-line companies. Last year's roster included such industry giants as Alcoa Inc. (NYSE: AA), Kraft Foods Inc. (NYSE: KFT), General Electric Co. (NYSE: GE), and E.I. DuPont de Nemours & Co. (NYSE: DD), along with drug makers Pfizer Inc. (NYSE: PFE) and Merck & Co. Inc. (NYSE: MRK).

This year’s list of Dow Dogs, ranked by current dividend yield, is led by Verizon Communications Inc. (NYSE: VZ), AT&T Inc. (NYSE: T), Merck, Pfizer, and Kraft -- Johnson & Johnson (NYSE: JNJ), Chevron Corp. (NYSE: CVX), Proctor & Gamble Co. (NYSE: PG), McDonald’s Corp. (NYSE: MCD) and DuPont take up the next five slots.

Another reason offered for the Dogs' success is that they are often cyclical stocks that are at a low point and ripe for a turnaround. Their juicy dividends can also provide income and help soften the blows of any market weakness, making them a popular investment.

You can find more details on the Dogs of the Dow theory, and some variations, at investing information website Investopedia.com.

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