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5 'Dogs of the Dow' to Stomp the Market

Stocks in this article: GEINTCMRKTVCX

BALTIMORE ( Stockpickr) -- While most investors spend the last quarter of the year looking for the top trades to head into 2014, I'd recommend looking at the bottom of the list for buying opportunities.

>>5 Stocks Under $10 Set to Soar

Yes, I realize how crazy that sounds.

The thing about focusing on the bottom of the list is that they're the names that are the most ignored. As a result, they're the ones that have the most potential to fly when they impress investors. And as unorthodox as that strategy sounds, I'm not exactly breaking new ground here; it's the basic concept behind the "Dogs of the Dow" strategy that Michael O'Higgins introduced in 1991.

The Dogs of the Dow is a strategy that's built around simply buying the 10 highest-yielding Dow Jones Industrial Average stocks, rebalancing once a year, and holding on. Because yield is inversely related to performance, these big names tend to be lower performers out of the big index's 30 names.

So should you be buying the dogs this fall?

>>5 Big Stocks to Trade for Big Gains

In a nutshell, the Dogs of the Dow strategy works exceptionally well in bull markets, and a whole lot less well when the market is showing signs of weakness. I've certainly made no secret of the fact that I think we're in the early stages of a secular bull right now.

That doesn't mean that you should buy the textbook version of this strategy. With only 30 blue-chip stocks in the index, diversification is a real problem. After all, the super-high yields are contained within a couple of industries. But limit your industry overlap, and this approach starts to look a little more interesting.

>>5 Stocks the Pros Hate -- but Should You?

In fact, my own research shows that paring down the Dogs of the Dow to a more concentrated portfolio of five stocks, rather than 10, has delivered some stellar outperformance in the last decade without ramping up the risk. So today, we'll take a closer look at five Dogs of the Dow stocks.

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