'Dogs of the Dow': No, You don’t have the wrong fire hydrant

Shades of St. Alpo! Fans of the "Dogs of the Dow" investment strategy say they have a lot to cheer about right now. The strategy, which is hinged partly on the hope that blue chips that did poorly in the preceding year will make a recovery, is proving to be a profitable one for 2006.

The Dogs of the Dow method involves investing in the 10 components of the Dow Jones Industrial Average with the highest dividend yield and holding those stocks for about a year. The dividend yield is calculated by dividing a company's dividend by its stock price. So, many of the Dow components with the highest dividend yields have seen their share price decline during the preceding year, making them the supposed underdogs of the stock market.

By the end of August, the so-called Dogs had total returns of about 21% for 2006, according to data from Dow Jones Indexes. That was well above returns of about 7.9% from the industrial average as a whole.

Believers focus on the Dogs for a number of reasons. "They are all large, dividend-paying companies we have all grown up with," said Neil Hennessy, president and portfolio manager of the Hennessy funds, a proponent of the Dogs of the Dow theory. "You are getting paid to wait for the stock to go up in value."

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