It’s a new year and time for the Dogs of the Dow, which is one of the longest running and easiest to implement strategies.

The Dogs of the Dow is a stock picking strategy devoted to selecting the highest dividend paying stocks in the Dow Jones Industrial Average. Yield is the annual dividend from a company divided by its stock price. The higher yields of the “Dogs” signal that their stock prices have declined the most among the Dow’s 30 blue-chip companies. In essence, the goal of the strategy is to earn more dividend income and hope that the stocks also mount a comeback. The Dogs are bought on the first day of the year and sold on the last day of the year.

Traditionally, the Dogs of the Dow invests in the 10 highest yielding stocks; there is a variant, known as the “Small Dogs”, that invests in the 5 highest yielding and lowest priced stocks. This column will follow the “Small Dogs”.

This year’s Small Dogs are:

ATT (symbol: T)
Pfizer (symbol: PFE)
General Electric (symbol: GE)
Intel Corporation (symbol:INTC)
CSCO: (symbol: CSCO)

Here is a table showing the total returns for various calendar years ending December 31, 2011. What should be noted is that this strategy is NOT protective during a bear market. See the 2008 column. Of note, the traditional Dogs of the Dow (10 stocks) out performed the Dow Jones Industrial Average by 700 basis points in 2013.

Dogs of the Dow Returns

Performance

We will look at 2 portfolios in this column, and both will utilize the 5 stocks in the “Small Dogs”. The first portfolio will be passive and reflect the normal buy and hold philosophy of the original strategy. For book keeping purposes, this strategy will utilize the opening prices from the first trading day of the year (January 2, 2014). This is table 1 below. This passive portfolio was started with $99,992.71, and each equity has received a 20% allocation.

Table 1. Small Dogs/ Passive Strategy

The second portfolio is active and we will attempt to improve our returns through more timely entries and exits. This will be the thrust of the analysis in this column. This active portfolio will start with $100,000, and these positions will be discussed in the following pages. Unless otherwise stated, all charts used in this analysis will be on a weekly time frame.

Over the past 2 weeks, we added positions in T and CSCO.  We had been in both issues previously, and we were taken out as prices closed below support levels.  2 weeks ago, both T and CSCO recaptured support, so we became buyers.  The active Dogs of the Dow Strategy is outperforming both the Dow Industrials and the passive Dogs of the Dow strategy. While the markets have not been cooperative, our strategy has outperformed with less volatility. This is always a good thing.

Table 2. Small Dogs/ Active Strategy

ATT (T)

1) T recaptured resistance (old support) two weeks ago

2) And we were a buyer the following week at the open

Pfizer (PFE)

1) Still consistent with a double top

General Electric (GE)

1) We were buyers at 24.68

2) A weekly close below 24.68 is a reason to be a seller

3) This is our second go around with GE

Intel (INTC)

1) We were buyers at the 24.43 support level

2) We become sellers on a weekly close below the 40 week moving average

CSCO (CSCO)

1) CSCO  broke support at 21.58 and then quickly recaptured this level

2) We were buyers at last week’s open

3) 21.58 is support