A recent article in the paper reminded me of the importance of dividends in outperforming the market. Many academic studies have shown that dividend-paying stocks outperform their non-paying brethren by leaps and bounds over time.

Further to that, I took a look at the current constituents of the Dow Jones Index, and the current yields available there, with the idea that, based on today's share prices, some of the companies are better situated to outperform the index over the next while. Here are the recent stock prices and the most recent dividends payable for each company (sorted by dividend yield):

Stock - Current Price - Dividend Yield (%)

Bank of America - $29.58 - 8.65%
Pfizer - $18.89 - 7.09%
Citigroup - $18.85 - 6.79%
AT&T - $31.40 - 5.48%
Verizon Comm. $34.45 - 4.99%
Merck - $32.68 - 4.65%
General Electric - $28.71 - 4.53%
Home Depot - $23.80 - 3.91%
JPMorgan Chase - $39.52 - 3.85%
Dupont - $43.81 - 3.74%
Chevron - $82.56 - 3.23%
American Int'l. Group $27.24 - 3.23%
Coca-Cola - $52.06 - 3.07%
3M - $70.95 - 2.90%
Johnson & Johnson - $69.03 - 2.72%
Boeing - $63.83 - 2.66%
McDonalds - $58.65 - 2.64%
Procter & Gamble - $64.46 - 2.64%
Intel - $22.01 - 2.61%
Caterpillar - $70.48 - 2.47%
United Technologies - $65.23 - 2.19%
Alcoa - $31.81 - 2.14%
American Express - $36.62 - 2.05%
ExxonMobil - $81.70 - 2.02%
Microsoft - $26.16 - 1.80%
Wal Mart - $56.83 - 1.74%
IBM - $128.53 - 1.63%
Disney - $31.10 - 1.25%
Hewlett Packard - $43.71 - 0.73%
General Motors - $11.90 - nil (dividend suspended)

These stocks have a median yield as represented by Johnson & Johnson/Boeing of 2.68% and a mean average yield of 3.25%.

What I am looking for here is stocks that seem to be mispriced in my favor - in other words, the dividend yield is higher than might be expected, while the prospects going forward over the intermediate term (5 years or so) for the company remain decent or better. Furthermore, I am looking for companies whose future is less likely to be impacted by higher inflation than average - typically, companies that have lower than average CAPEX requirements. Overall, this is an approach similar to a "Dogs of the Dow" strategy.

Leaving aside the prospects for the financial companies, who have an uncertain outlook - to say the least - over the next while, I like the following basket as likely to outperform:

Drug Companies:
Merck, Pfizer
Communications:
Verizon, AT&T
Consumer:
Coca-Cola, Johnson & Johnson, Proctor & Gamble
Other:
General Electric

These stocks have a median dividend yield of 4.59% and a mean average dividend yield of 4.40%.

While I like some of the companies prospects whose dividends lie in the bottom half, I think that their yield indicates that the market likes them a bit too much at present. If their dividend yield were to rise, the following companies might also interest me:

Hewlett-Packard, Disney, Wal-Mart, Microsoft, Intel, McDonalds (good news already priced in).

That's it - we'll check back on this basket at my annual review cycle, versus the Dow Jones Industrial Average ETF "DIA" which is currently priced at $113.17.

Disclosure: No positions held.