Contrarians' Day: Unleashing the Dow Dogs

The dividend yield on the Dow industrials has trickled higher in recent years, but it still remains low by historical standards. The current average yield of the Dow industrials is 2.35%, compared with a median yield of 4.54% from 1871-2001. This is partly to blame on new additions to the Dow such as Microsoft(MSFT) and Intel(INTC) that don't offer much in the way of dividends -- if anything. But it has more to do with the fact that dividends have been declining in popularity for decades, reaching a nadir in the late 1990s. Investing based on dividend yields, while better than in recent years, doesn't offer as much bang for the buck as it used to.

Lastly, investors aren't getting a ton of diversification by buying these 10 stocks, most of which fall under the large-cap value category. If you don't have a ton of money to spread your assets around, the Dogs might not work for you.

Two Ways to Play

Investors eager to give the Dow Dogs a try have two solid options. The first: Get a discount broker and buy the 10 stocks outright.

While buying individual stocks can be costly, discount broker Scottrade lets you buy stocks for $7 a trade -- and doesn't hit you with inactivity fees and other subtle money-drainers that other brokers do. For about $70 a year, an investor can run with the Dow Dogs -- that's 0.7% for a $10,000 portfolio.

Investors who would rather have a manager do the work for them can check out the (HDOGX)Hennessy Total Return fund, ticker symbol HDOGX. The fund basically apes the Dogs of the Dows strategy -- it owns 14 Dow components offering high yields. The strategy has worked: Its three-year average annual return of 5.68% ranks in the top 5% of all large-cap value funds, according to Morningstar.

The 2.33% expense ratio is pretty steep, well above the 1.39% expense ratio of the average fund. However, the fees come in below those levied by unit investment trusts that track the Dow Dogs -- expenses here can run north of 3%.

Well, that's a decent introduction to this contrarian strategy. But there are many nuances to Dow Dogs -- including modified versions such as the Dow Five. For investors looking to delve deeper into the Dog Pound, check out the stellar Dogs of the Dow Web site.

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