Run With the Dogs of the Dow?

What could be a better antidote to market volatility than a mixture of high-yielding blue chips? How about the ten top payers in the Dow Jones industrial average, better known as the Dogs of the Dow?

Let's take a close look at the hounds as a group: Pfizer (symbol PFE), Altria (MO), Verizon (VZ), AT&T (T), General Motors (GM), DuPont (DD), Merck (MRK), Citigroup (C), JP Morgan (JPM) and General Electric (GE) currently yield an average of 3.6% (the entire Dow 30 industrials pay 2.2%).

The ten Dogs fought off the worst of the virus that slashed 1,070 points off the average from its high on July 19 to its trough on August 16. During that spell, six Dogs lost less than the average's 7.7% drop, and two others each lost 7.8%, essentially a tie -- and that's before accounting for a month's worth of dividends. So there was a margin of safety in this strategy.

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Extend the analysis through September 5, and the Dogs' results are little changed, with this exception: The two financials among them, Citigroup and JP Morgan, whose shares held up as the market plunged, failed to recover alongside most of the other canines once the panic eased a couple of weeks ago.

This isn't a shock. Alarming financial news continues to pressure companies tied to lending and housing but doesn't extend to other industries that are well-represented in the Dow, such as health care, telecommunications and everyday consumer products.

That said, if you are looking for high-quality individual stocks at post-slide prices and appreciate the comfort of a good dividend yield, some Dogs warrant consideration. Let's judge them one by one, working from the highest yielder to the lowest. Performance is from July 19 through September 5.

Pfizer ($24.71, yield 4.7%, down 2.2% since July 19). The long bear market in the drug giant ended a couple of years ago. Since then, it's become a sideways kind of stock with a high dividend. Lipitor, its cash cow, becomes less lucrative every year. You can do better.

Citigroup ($46.00, yield 4.6%, down 10.8%). Citi is like Wal-Mart, a giant whose stock keeps running into one wall or another. You would think Citi's high yield and low price-earnings ratio of ten make it a sure thing, but this isn't the time yet for financials that can't get out of the headlines. The risk is too high.

Altria ($68.63, yield 4.3%, down 2.4%). It's spinning off international tobacco assets and plans to raise its dividend and buy back more shares. The spinoff will tilt the business more toward domestic tobacco operations. Regardless of whether that matters to you, the former Philip Morris has been one of the Dow's best performers in up and down markets, and there's little reason to expect that to change.

Verizon ($41.95, yield 3.9%, unchanged). The stock's having a good year, and the telecom and tech businesses would seem to be well insulated from the goings-on with hedge funds and mortgage defaults. Verizon shares are a good source of growth and income.

AT&T ($39.73, yield 3.6%, plus 0.2%) Read the Verizon comment. The stocks have been mirroring each other for most of the year.

JP Morgan ($44.17, yield 3.4%, down 9.6%) It's had trouble with home-equity loan losses. But once the housing-finance thing blows over, the stock looks like a good value. Its P/E is comparable to that of Goldman Sachs, but its dividend yield is much higher.

General Motors ($31.07, yield 3.3%, down 13.7%). The world believes that the housing slump means fewer people can refinance their houses to get the money to buy cars and trucks. Whether that's true -- and it may apply more to GM than to, say, Honda -- the stock's going nowhere. And that yield isn't much given the company's endless struggles and periodic dividend cuts.

Merck ($49.40, yield 3.1%, down 1.1%) The drug maker, which is recovering from a decline in the early years of the decade, had just increased its earnings "guidance" for the rest of the year when the market went into its fall. Analysts keep upgrading Merck, but the stock is starting to look a bit expensive. Merck is safe and effective, just not exciting.

DuPont ($48.40, yield 3.0%, down 9.3%). This drop is more a consequence of a lousy second quarter than the market's malaise. The business may recover, but the chemical maker has boosted dividends just 1% annually over the past five years. So it's impossible to make the case for DuPont on its yield. Wait and see if the third quarter is any better. If it is, this stock should perk up. True industrials are still among the best performers.

General Electric ($38.75, yield 2.9%, down 4.2%). This is a global growth company with a good yield, but it's hard to see big dividend growth because GE is already paying out half of its earnings in cash. The company has a host of fans because of its astonishing mix of businesses, but, as a whole, GE's rates of return, profit margins and other financial indicators are little changed over the past five years, just like the stock. Still, GE is rock solid and is a defensible choice for patient, conservative investors.

If you're interested in the Dogs but don't want to buy the individual stocks yourself, there are a number of funds and unit investment trusts that follow this strategy. One simple way to do so is through Defined Strategy Fund (DSF), a closed-end fund that owns only the ten Dogs, in roughly equal weight. DSF has a major allure: At its September 5 close of $21.11, the fund trades at a 5% discount to the net asset value of its holdings. And the Dogs have been at their collective best during previous down markets. In 2002, for example, the ten highest yielders lost 9%, compared with a 15% drop in the full Dow and a 22% plunge in Standard & Poor's 500-stock index.

Another way to go: You get blue chips, high income and much wider diversification in the exchange-traded iShares Dow Jones Select Dividend Index Fund (DVY). The ETF fund holds more than 100 stocks and has regularly outperformed Defined Strategy without interruption since DSF's launch in January 2005.

My advice: Today, with the market showing signs of improved health, buying the Dogs is not that simple a call. Just as the real world of pooches includes poodles, schnauzers, mutts big and small, pit bulls and Great Danes, there are huge differences among the Top Ten dividend payers. It's hard to see why anyone would invest in this exact collection of disparate businesses if not for their coincidental position as the Dow's highest yielders.