What are 10 of the best ASX stocks to own for income seekers?

You might be surprised to learn that Telstra Corporation Ltd (ASX:TLS) hasn't made the list!

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Many investors will be familiar with the term The Dogs of the Dow. Intuitively, many investors probably assume this term refers to a system for selecting stocks based on last year's poorly performing ("dog") stocks in the expectation that they will become this year's better performers.

This is actually a misconception. The theory behind The Dogs of the Dow is actually based upon building a portfolio based on lagging, high quality, blue-chip companies.

Its inventor, Michael O'Higgins' mind-set was that blue-chip stocks have maintainable dividend payouts. According to his theory, this means a high yield is more likely a reflection of a low point in a company's business cycle than a sign of a declining dividend payout. On this basis, O'Higgins suggested buying the ten constituents of the Dow Jones that had the highest yields.

Utilising a screening tool and data supplied by Morningstar here is a list of the top yielding stocks amongst the 50 largest stocks listed on the ASX:

  • Worleyparsons Limited (ASX: WOR): yield 7.82%
  • Fortescue Metals Group Limited (ASX: FMG): yield 7.46%
  • DUET Group (ASX: DUE): yield 6.74%
  • Woodside Petroleum Limited (ASX: WPL): yield 6.37%
  • Insurance Australia Group Ltd (ASX: IAG): yiled 6.09%
  • Suncorp Group Ltd (ASX: SUN): yield 6%
  • AusNet Services (ASX: AST): yield 5.89%
  • Spark Infrastructure Group (ASX: SKI): yield 5.75%
  • Spark New Zealand Ltd (ASX: SPK): yield 5.67%
  • Scentre Group Ltd (ASX: SCG): yield 5.26%

The Dogs of the Dow theory appears to hold some merit based upon historical performance and given the enormous demand for high yielding stocks at present.

Only a starting point

Screens such as this one can provide a great starting point, however, care needs to be taken.

Firstly, it's important to look forward, not backwards when investing so before building a "Dog" portfolio, consider the outlook for future dividend expectations.

Secondly, it's preferable to compare yields on a grossed-up basis as this will account for differing levels of franking, thereby providing a more accurate comparison.

Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned. The Motley Fool’s purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead.  This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.  

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