Step 1
Go to http://www.shirleychong.com/keepers/retrieve.html and follow steps 1 to 17, take your time and don't rush the dog, make sure you meet the criteria for a step before moving to the next step. Instead of a dumbell you are going to use a tea towel that has a simple granny knot near the end. This makes it easier for the dog to grab hold.

Step 2
Get the towel and place it on the ground, send the dog out to retrieve it. Use the word "Achoo", then say "Fetch". We are teaching the dog a new cue word, which we do by saying the new word then the old word. Gradually phase out the fetch word, so you are simply saying "achoo". Start with the towel a short distance away, and inside the house away from distractions.

Step 3
Now put the towel slightly off the ground, on a low table, or a chair. We are teaching the dog that the towel is not always going to be on the ground. Practice in different areas.

Step 4
Now put the towel on the ground in front of your helper. Your helper should stand still and not say or do anything. We want the dog to concentrate on the task at hand.

Step 5
Get the helper to place the towel in their pocket, so that it is easy for the dog to take it out. The towel will be hanging way down with the knot near the floor.

Step 6
Gradually tuck the towel further and further into the pocket, so just a little bit is sticking out.

Step 7
Delivery, I don't like the dog to sit in front and hold as looks too formal. So I throw the towel on the ground, when the dog comes back, I pat my stomach and say "up" as he already knows to jump up. So the dog fetches the towel and jumps up on me and puts it right in my hand. You may need to teach your dog the up command. Which is simply encouraging the dog to jump up on you and click and treat when he does, you would do this separate to the retrieving though and then put it all together.

Advanced
For a demo, you would choose a volunteer from the audience, send the dog out to them to get the towel, and then when the dog returns with the towel, you would put it up to your face and pretend to blow your nose.

Also practice with different people and different distances.

You could also down size and use a hanky instead, or a tissue. You could even put the tissue in a tissue box

My dog took actually learnt this trick in a couple of sessions.  It helps if your dog already knows how to fetch a wagon, or tug.