Stock Quotes in this Article: CVX, DD, GE, JNJ, KFT, MCD, PFE, VZ

WINDERMERE, Fla. (Stockpickr) -- You’ve probably heard about the Dogs of the Dow investment strategy, which has been very popular over the years for investors who love to hunt the markets for yield.

The Dogs of the Dow is a unique investment option that involves the 10 highest-yielding dividend stocks of all the 30 Dow Jones Industrial Average components. This strategy is put into action by determining the key 10 stocks after the close of the market on the last trading day of the year, which for 2010 was Friday, Dec. 31, and investing an equal dollar amount into each. The idea here is that these 10 names will continue to throw off solid dividends and even possibly raise their yields in the coming year. Of course, the strategy also assumes that investors will see solid price appreciation in the future.

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    This strategy has produced decent to mixed results in the past, but for 2008 and 2009 the results vs. the total return of the Dow Jones Industrial Average weren’t anything to write home about. For 2010, the popular strategy produced decent results. The Dogs handily beat the Dow Jones Industrial Average, finishing the year up 15.5% while the Dow closed the year up 11%.

    Below are the results for the Dogs and the Dow for the six years prior to 2010.

    If you’re interested in buying the Dogs of the Dow stocks as the strategy suggests here are the 2011 Dogs of the Dow components, listed in order by highest to lowest dividend yield:

    Note that our list does not include Intel (INTC), which in November boosted its dividend by 14%, beginning with the first quarter of 2011. Indeed, with the dividend hike, Intel would yield 3.4%, which would kick GE off the list, but our list is based on current yields as of the close of trading on Friday. Thus, GE stays.

    A good thing about the Dogs of the Dow strategy now is that it’s not as popular as it once was since the returns were so poor in 2008 and 2009. The reason the returns were lackluster in those years is because during the financial crisis, a number of the Dogs components actually cut their dividends to save cash and shore up their balance sheets. Since the strategy is now so out of favor, it could mean that the new Dogs are ripe for some big returns in 2011.

    I am going to take this strategy one step further for anyone who might be interested in playing the Dogs of the Dow with a new twist. Instead of investing an equal amount in all 10, I am going to suggest that market players overweight the names that are already trending in the right direction and possibly avoid or underweight the losers of 2010.

    In fact, I will break a few down for you so that you have an idea of which Dogs of the Dow stocks look like they could have a big 2011 based off of how they’re already performing.

    One Dow Dog that looks ready for big gains in 2011 is Chevron (CVX). This company operates as an integrated energy firm worldwide that focuses on oil and gas. So far in 2010, the stock has returned around 18%.

    What I really like about Chevron is that the stock is going into 2011 trading near its 52-week high, which is currently $92.39. This demonstrates that the stock is strong and trending in the right direction as 2010 comes to a close. The stock is also extremely cheap, trading at a forward price-to-earnings of only 9.

    The real driver for Chevron into 2011 will be the price of crude oil, which is currently trading above $90 a barrel. My take is that crude oil is going to go much higher in 2011 due to a number of catalysts, such as the weak dollar, strong demand from emerging markets that has created a situation where demand is higher than oil supply, and the possibility of another bubble developing in the oil complex. I think another bubble could be coming for oil after all of the quantitative easing from the Federal Reserve. If the quantitative easing continues in 2011, then it will weaken the dollar further, thereby pushing oil up well past $100 a barrel.

    I would advise market players to watch for shares of Chevron to trade above $105 a share in 2011. If the stock can clear that price level it will push the stock into all-time high territory. This will be the confirmation you’ll need to know that Chevron is going to be a Dog winner in 2011.

    Holders of Chevron include T.Boone Pickens, who increased his position in the stock by 2.5% in the most recent reporting period, and Brian Rogers. Robert Holmes named it one of the best dividend stocks to play defense in the coming year, and Forester Value Fund manager Tom Forester selected it as one of his "five perfect stocks for 2011."

    Verizon (VZ) is another Dog name that I think will have a big 2011. This company is a provider of communications services in the U.S. and internationally. Verizon operates in two major segments: wireline and domestic wireless. The stock hasn’t exactly hit the cover off the ball in 2010, with shares up only around 7.3%. However, Verizon has a major catalyst heading into 2011 that could significantly boost its stock price: the potential of a big Apple (AAPL) iPhone 4 contract.

    There are rumors on Wall Street that Apple is going to announce a Verizon iPhone 4 deal sometime around Valentine’s Day. If Verizon does indeed get the iPhone, it should boost the stock significantly as new customers pick Verizon, which is perceived to have a better network, over AT&T (T). Keep in mind that AT&T was just crowned the “worst carrier” in America in a Consumer Reports survey, while Verizon tied with Sprint Nextel (S) as the best.

    That said, don’t expect to see a ton of existing AT&T iPhone users switch over to Verizon immediately since they’ll have to pay costly contact cancellation fees and buy a new iPhone 4 that will only work on Verizon’s network. However, there’s one wildcard, which is if Verizon offers to offset some those costs to get AT&T customers to switch over to their network.

    If Verizon gets smart and does something along those lines, then the company could really benefit big from getting the iPhone 4. Just the potential of this alone would keep me out of AT&T and get me long Verizon when considering playing the Dogs, at least for the first half of 2011. I would like to point out that both stocks are trading near 52-week highs, but AT&T is actually underperforming Verizon, with the stock up only 4.5% on the year.

    George Soros increased his stake in Verizon in the most recent reporting; the stock now makes up 1% of his total portfolio. Other major holdings include Moore Capital and Arnold Van Den Berg. Verizon is one of five stocks in Jim Cramer's updated diversified dividend portfolio, and Robert Holmes called it one of the best dividend stocks to play defense in 2011. That said, some crticis don't think Verizon even belongs in the Dow.

    Another Dog name that should see a great 2011 is McDonald’s (MCD). This stock has been a big Dow winner in 2010, with shares up over 22%. Much of that success is due to the company’s efforts in upgrading its menu with healthier foods and its global expansion into emerging markets such as the Middle East and parts of Asia.

    The weak dollar has also helped to boost McDonald’s bottom line, but the cause of that weak dollar -- quantitative easing -- could also hurt McDonald’s with rising food prices. Let’s face it, quantitative easing is causing inflation no matter what the Fed tells us, and that is demonstrated by the huge run in agricultural commodity prices we’ve seen in 2010. If that continues into 2011, it could hurt McDonald’s. However, any rise in food prices could easily be passed along to the company’s customers since their menu is already extremely affordable. I would go as far as to make the argument that rising food prices will really hurt the middle- to upper-end restaurants, which will in turn benefit McDonald’s.

    Even if McDonald’s is hurt domestically by rising food costs, the company should be able to offset those problems with its aggressive overseas expansion. The company just announced a few weeks ago that it will expand its presence by 40% into China with 200 new stores over the next three years, on top of the 1,200 stores it already operates in China. Now is not the time to worry about the food price increases because McDonald’s is in full growth mode.

    The stock is currently trading around four points off its 52-week high of $80.94. Market players should look to pick this Dow Dog up on the weakness and expect more solid gains in 2011.

    Major holders of McDonald's include the Bill and Melinda Gates Foundation, with a 4.8% stake as of the most recent period, Louis Navellier, and Karen Finerman. With an A+ buy rating from TheStreet Ratings, McDonald's is one of the top-rated restaurant and hotel stocks.

    Two more Dogs of the Dow that are already trending in the right direction are General Electric (GE), up around 20% year-to-date, and DuPont (DD), up a whopping 47% year-to-date. General Electric recently announced that it is boosting its quarterly dividend by 2 cents to 14 cents a share, which is the second increase this year. This still leaves the company short of the 31-cent dividend it paid before the financial crisis, but it demonstrates that GE's efforts to raise its dividend as the economy improves, potentially back previous levels.

    If this trend continues in 2011 for GE, it should bode well for its share price. The company will also benefit from any economic recovery since the firm is so widely diversified among so many different growth sectors like medical imaging, security technology and energy and power generation.

    Major holders of General Electric include Warren Buffett and Bruce Berkowitz.

    So we've identified some of the Dogs of the Dow leaders that I recommend market players be overweight. Let's take a look at the losers, with an underweight recommendation.

    The worst-performing Dogs of the Dow in 2010 are health care products company Johnson & Johnson (JNJ), which has dropped around 3.7%, and global biopharmaceutical company Pfizer (PFE), which is off by 3.6%. Notice a theme here with these two stocks? You guessed it: health care and drugs. Both sectors have been weighed down all year by the uncertainty surrounding the coming changes to health care.

    How can we fix this problem? Simply underweight these two names and overweight packaged food products company Kraft Foods (KFT). I know that Kraft Foods isn’t a drug or health care alternative, but the company operates in the growing snack and beverage market and convenient meals market, which are showing no signs of weakness. More important, the stock is trading near a 52-week high of $32.67 , and shares were up over 16% in 2010.

    As much as I would like to see a major trend where Americans eat healthier, it’s just not happening at a rate that will affect Kraft Foods, whose brands include Oreo, Miracle Whip and Oscar Mayer.

    Also bullish on Kraft is Bill Ackman' Pershing Square Capital Management -- the stock is the fund's top holding at 21.1% of the total portfolio -- and 24/7 Wall St. called the stock one of Warren Buffett's 10 best investments for 2011. Jake Lynch said it was one of the best Dow stocks for the new year.

    To learn more about which Dogs of the Dow stocks you should buy and which you should avoid, check out the Top Dogs of the Dow for 2011 portfolio on Stockpickr.

    -- Written by Roberto Pedone in Winderemere, Fla.

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    At the time of publication, author had no positions in stocks mentioned.

    Roberto Pedone, based out of Windermere, Fla., is an independent trader who focuses on stocks, options, futures, commodities and currencies. He is also an outside contributor to Beconequity.com and maintains the website Maddmoney.net, which he sold to Blue Wave Advisors in 2008. Roberto studied International Business at The Milwaukee School of Engineering, and he spent a year overseas studying business in Lubeck, Germany.