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Dogs of the Dow's 'Mutts' Have No Bite

NEW YORK ( TheStreet) -- At the beginning of every year, proponents of the "Dogs of the Dow" investment strategy trot out the 10 highest-yielding stocks in the Dow Jones Industrial Average and suggest buying them as a means of beating the market.

Although every dog has its day, there are always some perennial losers in the pack, in terms of return on investment, so strictly hewing to that strategy has its faults.

For example, 2010 was the first year since 2006 when the Dogs' return outdid that of the Dow, excluding dividends. The group has only done it three times in the past eight years, and only in 2006, when the Dogs returned 30% vs. the 19% of the Dow, was it a blowout victory.

But 2010 was also a very strong year for the Dow Dogs' strategy, as the group returned an average 16.3%, while the blue-chip index returned 11%.

The average 3.87% yield the class of 2010 paid in dividends also makes the Dogs of the Dow strategy worth considering.

But every year there are a couple of mutts among the Dogs that investors would have best avoided. Lately, they've been from the health care sector, one of the poorest-performing groups in 2010 with a return of 6.5%, which is next to last out of all investment sectors.

In 2010, the Dogs were held back by pharmaceutical giants Pfizer (PFE - Get Report), down 3.7% on the year, and Merck (MRK - Get Report), off 1.4%. A newcomer to the Dogs that's going on the list for 2011, health care products conglomerate Johnson & Johnson (JNJ - Get Report), was right in step, losing 4% in 2010.

And yet analysts are fond of these stocks because of their long-term prospects, which are built on the idea that a glut of baby boomers, now edging into retirement, will gobble an ever-increasing number of drugs as they age. The elderly currently account for about one-third of drug industry sales.

So we decided to look at the prospects for those three companies, as well as two of their competitors that face similar challenges.
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ABT $38.50 1.05%
BAX $45.30 0.40%
JNJ $112.88 0.59%
MRK $54.09 -1.31%
PFE $33.57 0.51%


Chart of I:DJI
DOW 17,660.71 +9.45 0.05%
S&P 500 2,050.63 -0.49 -0.02%
NASDAQ 4,717.0940 -8.5450 -0.18%

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