Sunday, April 24, 2011

The Dogs Of The Dow Strategy

The Dogs of the Dow is a fairly simple investment strategy. It was proposed by Michael O'Higgins in the early 1990's and it basically says take the 10 stocks with the highest dividend yields and buy them for next year because those stocks should outperform.

So you should pick the 10 highest yield shares in the Dow Jones Industrial Average and put an equal amount of money into each of them. Adjust the portfolio once a year so that it once again has equal amounts in the top ten shares by yield.

The strategy has become so popular that there are even two special Dow Jones indices (the Dow 5 and the Dow 10) that track the performance of Dogs of the Dow type strategies.

The track record of this type of value investing is fairly good, and it is certainly a strategy worth considering.

It also has the advantage of requiring a portfolio re-balancing only once a year which means that trading costs are low. Using an execution only broker who charges a flat rate per trade, the maximum possible commission paid per year is just twenty times the commission per trade. It is likely to be much lower.

HOW HAVE DOGS OF THE DOW STOCKS PERFORMED LATELY:

- During the tech bubble of the late 90s, the high dividend stocks of the Dogs of the Dow were up 28.6% in 1996, up 22.2% in 1997, up 10.7% in 1998, and up 4.0% in 1999.

- During the difficult bear market years of 2000 - 2002, the Dogs of the Dow were up 6.4% in 2000, down 4.9% in 2001, and down 8.9% in 2002, and that was enough to significantly outperform the Dow, S&P 500, and Nasdaq.

- In 2003, the high dividend stocks of the Dogs of the Dow gained 28.7% and made new, all-time highs despite the massive bear market of 2000-2002!

- In 2004, the high dividend yield Dogs of the Dow remained in record territory with a 4.4% gain and then gave back 5.1% in 2005.

- In 2006, the Dogs of the Dow surged to new record highs with a gain of 30.3%. The Small Dogs of the Dow did even better with a gain of 42%!

- In 2007, the Dogs of the Dow and the Small Dogs of the Dow were flat but declined in 2008 along with the rest of the market as the financial crisis unfolded.

- In 2009, the Dogs of the Dow rebounded with a 16.9% gain.

- In 2010, the Dogs of the Dow significantly outpaced the Dow with a gain of 20.5%. The Small Dogs of the Dow did even better with a gain of 26.7%!

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