Dogs of the Dow: Dividends miss rebound trends

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If you are looking at your day-timer and noticing that there are only seven weeks left in 2012, you might also be wondering which of the year's investing strategies have a limited amount of time to pay off.

One of those that could go either way? The Dogs of the Dow.

This is the simple strategy of buying the 10 highest-yielding stocks in the Dow Jones industrial average at the start of the year and holding them until the end of the year, at which point you buy the next batch of dogs. The idea behind the strategy is also simple: High yielding stocks tend to be beaten up, so the strategy forces you to buy low and sell high – well, ideally.

This year, the strategy's success is only so-so. It has a year-to-date return of 9 per cent, after factoring in those juicy dividends. While that beats the Dow by about two percentage points, it lags the S&P 500 by more than two percentage points.

Bespoke Investment Group has an interesting roundup of Dow performers this year, ranked by dividend yield – and two things jump out: Some big dividend-yielding stocks have had a terrible year, while some small-yielding stocks have had a terrific year.

On the terrible side: Hewlett-Packard Co., with a yield of 4 per cent, has fallen 49 per cent; Intel Corp., with a yield of 4.4 per cent, has fallen 15 per cent; and McDonald's Corp., with a yield of 3.6 per cent, has fallen 15 per cent.

On the terrific side: Bank of America Corp. has risen nearly 70 per cent, Walt Disney Co. has risen more than 28 per cent and Home Depot Inc. has risen nearly 52 per cent.

Now, this isn't a condemnation of the dividend strategy – and even fans of the Dogs of the Dow will readily admit that the strategy doesn't promise to make winners out of all 10 dogs. But if the strategy is intended to direct investors into the most beaten-up stocks, it sometimes misses out on one key fact: Some of the most beaten up stocks come without dividends.

Bank of America and Home Depot, neither of which are dividend plays, have done well as investors position themselves for an improving economy and a rebounding housing market. By focusing on dividends, you just might miss out on both trends.