An almost stupidly simple investing strategy first popularized 20 years ago generated remarkable returns in an otherwise lousy year for stocks. The so-called "Dogs of the Dow" approach, where investors simply buy the 10 highest yielding stocks in the Dow Jones Industrial Average at the beginning of the year, clobbered every major market index in the world in 2011.
The 10 Dow stocks with the highest dividend yields at the end of last year are up an average of nearly 13 percent in 2011, according to Bespoke Investment Group. And that's just by price alone. AT&T (T), for example, has gained a bit more than 2 percent in 2011, but its dividend was yielding nearly 6 percent at this time last year. Add it all together and the sleepy telecom stock has returned about 8 percent for the year to date.
Consider that the S&P 500, the most common benchmark for U.S. stock performance, has returned just 1.5 percent for the year so far (and is down 0.6 percent on a price basis), and the Dogs of the Dow clearly win best in show. See the chart, courtesy of Bespoke Investment Group, below:
DuPont (DD) is the only Dog of the Dow to decline in 2011, but then its 7.3 percent price drop was cushioned by a 3.2 percent dividend yield (if you bought the stock a year ago), making the negative total return about half as painful to a portfolio.
On the other side of the ledger, McDonald's (MCD) jumped 31 percent this year, all while throwing off another 3.2 percent in dividend yield. That's good for a total return of more than 34 percent.
Interestingly, if it weren't for the Dogs of the Dow, the blue-chip index would have no gains at all in 2011, according to Bespoke. The remainder of the Dow is off an average of 3.8 percent so far this year, meaning the 10 Dogs of the Dow have outperformed the other 20 stocks in the index by a whopping 16.6 percentage points.
Plenty of market strategists are extolling the virtues of buying big, dividend-paying stocks for 2012. It might be worth checking out which 10 blue chips qualify as next year's Dogs of the Dow when the market closes Dec. 30.