Dow dogs rule


Sometimes, the simplest investing strategies are often the most successful.

That seems to be case with the venerable Dogs of the Dow strategy, first popularized by Michael O’Higgins in his book Beating the Dow back in 1991.

What could be simpler than buying the 10 stocks in the Dow Jones Industrial Average with the highest dividend yield at the start of every calendar year?

 

dogs-of-dow

 

Paw Power

Once a year passes, you then rotate in the new top 10 Doggy stocks…and refresh every year going forward.

The basic idea: Dow stocks with high dividend yields tend to be out of favor with investors.

Dividend yield is a stock’s dividend as a percentage of the stock price and has an inverse relationship with with share price.

In other words, the higher the yield the lower the share price.
 

Buying Opportunity

Companies listed on the Dow tend to be blue chips with gold-plated balance sheets, great brands and enlightened management.

So if the share price of a DJIA stock is in the dumps, it may be undervalued and only in a temporary slump.

Dog of Dow investors this year have been richly rewarded, according to an interesting analysis by Bespoke Investment Group.

 

Top Dogs

The top 10 Dogs at the start of 2016 have delivered returns of 12.82%, versus 0.57% for the non-dogs.

 

stocks

Source: Bespoke Investment Group

 

Lapdogs

A variations on this strategy is called the Small Dogs of the Dow.

The approach here is take the five lowest-priced Dogs of the Dow stocks at the start of a year and invest an equal sum in each stock.

 

Money Scent

You can scoff at the simplicity of these approaches, plenty of active investors do, but you can’t argue with the results looking at the historical data.

Take a look at this table of historical total returns compiled by dogsofthedow.com.

Since the year 2000, the Dogs of the Dow and Small Dogs strategies have beat the Dow Jones Industrial Average and S&P 500 by wide margins.

 

stocks

Source: dogsofthedow.com.

 

Takeaway

It’s never wise to assume that past returns guarantee future success.

Yet, in my view, the Dog of Dow strategy can’t be dismissed out of hand as an investing gimmick.

The numbers this year at least are pretty impressive.

 

Photo Credit: Helgi Halldorsson via Flickr Creative Commons

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Xavier Brenner
Xavier Brenner
Xavier Brenner has covered global market, business and economic trends for Interactive Brokers Asset Management since 2013. An experienced financial journalist, Brenner offers analysis and insights on the stories that matter to the discerning investor.