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TheStreet Open House

3 Dow Dividend Stocks to Lead the Market in 2012

Stocks in this article: KFTINTCDDPFEMCDTMRK

NEW YORK ( Stockpickr) -- Roughly 20 years ago, investors started focusing on the " Dogs of the Dow ." These are the 10 highest-yielding stocks in the Dow Jones Industrial Average, and their above-average yield is often a sign of recent distress for the company involved. In theory, these high-yielders have been oversold (as the share price falls, the dividend yield goes up) and are most likely to outperform the rest of the Dow stocks in the next 12 months.

A clear pattern is emerging. The Dogs of the Dow outperformed the market in the first half of the 1990s and the first half of the last decade as well. Yet it underperformed in the second half of each decade. As we move through a fresh decade, that trend is intact.

>>7 Dividend Stocks Shoveling Cash to Shareholders



The Dogs of the Dow have returned about 10% thus far in 2011 (as measured by the 10 Dow stocks that offered the highest yield at the end of 2010), compared with flat results for the broader DJIA. McDonald's (MCD), Intel (INTC) and Pfizer (PFE) have led the way, with each rising more than 15% thus far in 2011.

The outperformance is understandable. The Dogs of the Dow tends to do well when investors are defensive. So if 2012 brings another year of investor uncertainty, the current crop of Dogs may lead the market once again in 2012.

Buy the Basket or Cherry Pick?

The above-cited performance results were generated by a passive investment strategy that holds all 10 Dow Dogs. You could also look to try to cherry pick the stocks that you think have the greatest chance for capital appreciation.

For example, AT&T (T), Merck (MRK) and Pfizer offer very juicy dividends, but organic growth at each of these companies is quite anemic, and it's hard to see how investors will suddenly find these stocks to be more appealing.

Perhaps a wiser path is to focus on other top-10 yielders in the Dow, focusing on those companies that appear poised for more robust growth. The remaining Dow Dogs appear to offer better paths to capital appreciation as each is expected to boost sales between 3% and 9% in 2012.

Here's a look at three companies that offer both a nice yield and decent growth prospects, perhaps making them the best way to pay the Dogs of the Dow strategy.

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