Here's how to beat the market this year: Bespoke

Looking to jump into recent rally? Look no further
Looking to jump into recent rally? Look no further

The Dow has staged a 6 percent rally since its mid-February low — and one market strategist says it's a shift in investor sentiment toward value stocks like the "Dogs of the Dow" that's actually driving the rally.

"Investors are coming into higher-quality stocks," Bespoke Investment Group's co-founder Paul Hickey told the "Fast Money" traders Wednesday. "And higher-quality stocks tend to pay dividends."

The "Dogs of the Dow" strategy is to invest in the 10 highest-yielding stocks in the index at the start of each year. So far in 2016, if you had used this strategy, you would have seen returns of 1.3 percent — while overall, the Dow has fallen 3 percent.

Of the 10 dogs, Verizon, Wal-Mart, Exxon Mobil Caterpillar and Procter & Gamble have seen the strongest moves higher in 2016, with returns of 12, 7, 5, 5 and 4 percent, respectively.

According to Hickey, historically, this investment strategy has been very profitable. In the last 16 years, the Dogs of the Dow have outperformed the Dow 11 times on an annual basis.

And he says this year is shaping up to be another success.

"There's definitely a good chance of continued outperformance," Hickey said in a note "Fast Money" producers. "What's interesting about the performance of the highest-dividend payers is that they led the market on the way down and on the way up."

Below, Hickey demonstrates how stocks with the highest dividends fell the least, 4.6 percent, when the market sold off 10 percent early in the year and also managed to outperform the most, 13.4 percent, when the market rallied in recent weeks.



"So if you see these types of stocks outperforming in both good and bad market environments that's a strong signal," said Hickey. "And the burden of proof is on you to explain why it will now stop."

He noted that investors influenced by the new rising interest rate environment are prone to "higher-quality" stocks defined at value, rather than growth.

"Rather than look at the highest yielders, we look for companies that have a higher-than-average payout relative to their peers as well, a history of hiking their dividends and the earnings power to continue doing that," said Hickey.