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Dogs of the Dow May Finally Get Their Day

BOSTON ( TheStreet) -- With U.S. stocks doubling since the market low in March 2009, investors may have forgotten that equities stagnated during the first three quarters of 2010.

Between Jan. 1 and Oct. 1, the S&P 500 Index rose a paltry 2.1%. But upon announcement of the Federal Reserve's so-called QE2, investors ramped up risk. The benchmark has risen 16% since October and is up 24% since rumors of QE2 -- the Fed's large-scale bond-buying program -- surfaced in late August. The Federal Reserve is scheduled to abruptly end its second round of purchases in June and already forecasters are warning of market dislocation.

In the monthly missive of Bill Gross, chief investment officer of Pimco, the bond guru questioned who would step up to purchase Treasuries once the Fed exits, warning that the bond market could fall sharply as the demand curve for securities reverts. Gross provides data indicating that yields are artificially low.

Conversely, others have pointed out that, following the end of QE1, Treasuries rallied significantly and stocks were dumped as investors sought safe-haven investments amid ongoing structural economic headwinds. The purpose of asset purchases is to spur investors to purchase riskier assets. So those that have rallied significantly, namely, stocks and commodities, could decline when QE2 concludes. Investors should consider defensive tactics before QE2 ends.

Dow stocks, still undervalued on a historical basis, aren't necessarily safe havens as hot names, such as Caterpillar (CAT), which has more than quadrupled since the March 2009 low, would be most likely to decline in a sell-off. But dividend-paying, cyclically resilient equities would probably gain attention.

Here's a look at the five highest-yielding Dow stocks, the so-called dogs of the Dow, ordered by yield. They are worth considering if markets turn volatile in coming weeks.

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