Theoretically these stocks are out of favor because if the dividend stays constant, a higher yield suggests a lower share price.
Confused? Perhaps it’s explained best on Wikipediawhich says proponents of the Dogs of the Dow strategy argue that blue chip companies do not alter their dividend to reflect trading conditions and, therefore, the dividend is a measure of the average worth of the company; the stock price, in contrast, fluctuates through the business cycle.
The strategy was first popularized by Michael O’ Higgins in his book, "Beating the Dow," published in 1991. O’Higgins showed that over the 17-year period from 1973 to 1989, his Dogs strategy averaged a return of 17.9% annually, compared to 11.1% for the Dow.
Did we lose you? Maybe this will help. Following are the highest stock dividend yields of the Dow 30. In otherwords
1. Bank of America 9.5%
2. Citigroup 9.4%
3. General Electric 7.7%
4. Pfizer 7.5%
5. Alcoa 7.20%
So should you buy these stocks?
I’d rather eat dog then shot off the list above bristles Jeff Macke. Dogs of the Dow is statistical backdating. It doesn’t work.
If you’re looking to get long a Dow stock look at McDonald’s, says Joe Terranova.
I prefer Kraft, adds Guy Adami.
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Trader disclosure: On Dec. 29th, 2008, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s Fast Money were owned by the Fast Money traders; Macke Owns (DIS), (WMT), (SDS), (TM), (MSFT); Adami Owns (AGU), (BTU), (C), (GS), (INTC), (MSFT), (NUE); Najarian Owns (DOW) Call Spread; Najarian Owns (MSFT) And Is Short (MSFT) Calls
GE Is The Parent Company Of CNBC
Terranova Is Co-Portfolio Manager Of The Virtus Diversifier PHOLIO; Virtus Diversifier PHOLIO Owns (IGE), (DBC), (DBV)
Terranova Is Chief Alternatives Strategist Of Virtus Investment Partners, Ltd.; Virtus Investment Partners Owns More Than 1% Of (ABD), (ARE), (BIG), (OFC), (DLR), (EXR), (IGE), (MAC), (DBC), (DBV), (SKT), (UA), (CLB); Virtus Investment Partners Owns More Than 1% Of Seagate Tax Refund Rights