If you're looking for a non-emotional way of investing in the stock market, the Dogs of the Dow may be your answer. This is a value-oriented strategy that focuses on purchasing the 10 highest-yielding Dow Jones Industrial Average stocks on the first day of every year. The idea is that these are good, stable companies that have fallen on temporary hard times, artificially inflating their dividend yields. According to fund manager James O'Shaughnessy, the Dogs of the Dow strategy returned 14.3% a year from 1929 until 2003, outpacing the S&P 500's 11.7% return per year. In 2006, the Dogs of the Dow strategy returned 22%. At Stockpickr -- a new joint venture with TheStreet.com that lets you see the stocks that hedge funds, mutual funds and other investors are holding -- you can view the list of the Dogs of the Dow for 2007. I plan on rebalancing the list each month, so you can play a monthly Dogs of the Dow strategy. To be notified every time the rebalancing occurs, just bookmark the portfolio by rating it with four stars. Also, something that I believe is just as interesting is the Dogs of the S&P 500, which I plan to track on a regular basis. The highest-yielding company in the Dow is Pfizer ( PFE), with a 4.4% dividend yield. Pfizer was actually up slightly in 2006, but it fell about 10% off of its highs for the year -- reached in mid-September -- after announcing in December that it was removing its torcetrapib drug from the Food and Drug Administration approval process because of deaths during testing. This called into question the quality of Pfizer's pipeline, although Bank of America analyst Chris Schott, who maintains a buy rating on the stock, says the current pipeline is "underappreciated."
Furthermore, earnings estimates for Pfizer are actually higher now for 2007 than they were 90 days ago. Analysts expect the company to earn $2.18 per share in 2007, as opposed to the $2.12 they expected 90 days ago -- giving Pfizer a forward P/E of just 11. While this might be baking in the news of problems in the company's pipeline, it seems as if the worst news is behind it. In addition to the Dogs of the Dow, other portfolios holding Pfizer include those of super value investor David Dreman; Warren Buffett's old broker Tweedy Browne (and home of Chris Browne, author of The Little Book of Value Investing); and hedge fund Traxis Partners, run by ex-Morgan Stanley strategist Barton Biggs. To see the full list of professional portfolios and do-it-yourself portfolios that own Pfizer, check out Pfizer's Stockpickr page. Another member of the Dogs strategy, and a name that's also popular with the top hedge funds and mutual funds, is Citigroup ( C). With the stock currently yielding 3.5%, Citigroup CEO Chuck Prince has come under pressure to step down, and there are various rumors circulating that the company is going to split up. My guess is that 2007 brings some resolution one way or the other, and that the company returns to historical P/E levels. Right now it is trading at just 12 times next year's earnings, and its dividend at 3.5% is significantly higher than that of its competitors; fellow Dow component JPMorgan Chase ( JPM) offers a 2.8% yield. Bill Nygren at the Oakmark Fund is a major holder of Citigroup, as is the Dodge and Cox stock fund -- a mutual fund family that has easily outperformed the S&P 500 over the past 20 years. Check out Citigroup's Stockpickr page. Another dog of late is Verizon ( VZ). Verizon is trading at a meager 4.6 times cash flows -- enterprise value over EBITDA (earnings before interest, taxes, depreciation and amortization) -- meaning it is probably underleveraged compared with its cash flows. Verizon currently has a 4.4% dividend yield and is being hurt, in part, by the enormous $18 billion outlay it is making to build out its fiber-optic infrastructure. However, with more people turning away from TV and toward YouTube for their entertainment, companies like Verizon will be the main beneficiaries -- particularly because wireless-to-the-home will never be as fast as fiber-to-the-home. Top-performing hedge fund Schultze Asset Management owns Verizon. Schultze normally focuses on distressed situations. From a recent 13D filing it made regarding troubled footwear company Footstar, the fund stated two methods it uses to value a company: "One, enterprise value to last 12 months EBITDA, and, two, enterprise value to last 12 months sales." Looking at both of those metrics, Verizon is extremely cheap. For instance, although the company has an EV/EBITDA ratio of just 4.6, competitor BellSouth ( BLS) has an EV/EBITDA ratio of 10.7. And while Verizon has a dividend yield of 4.4%, BLS is just at 2.5%. While Verizon might not be a double from here, as these metrics could suggest, it's probably a safe bet going into 2007, when demand for bandwidth is going to be greater than ever, with no end in sight. Check out Verizon's Stockpickr page. For the rest of the Dogs of the Dow, and the funds that own them, check out the Dogs of the Dow page at Stockpickr.