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5 'Dogs of the Dow' to Buy in 2014

BALTIMORE (Stockpickr) -- The Dow Jones Industrial Average has been getting the short end of the stick in 2013. With the blue chip stock index trailing the S&P 500 350 basis points, it's the less exciting of the big indexes, despite the stuffy old Dow being up 25.7% since the first session of the year.

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But even though the Dow is trailing, it's still been posting some impressive numbers: More than half of the 30 stocks that make up the Dow are up more than 30% in 2013. So much for boring blue chips.

Better yet, the Dow could hold the keys to even more gains in 2014. All you have to do is look for the "dogs."

The Dogs of the Dow is a strategy that's built around simply buying the ten 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 late bloomers out of the big index's 30 names. So, should you be buying the dogs as the calendar flips over to 2014?

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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. But as far as I'm concerned, it's pretty clear that 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...

In fact, my own research shows that paring down the Dogs of the Dow to a more concentrated portfolio of five stocks, rather than ten, 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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