Dogs of the Dow: A Reliable Investment Strategy?
In the current economic climate, where stock market traders have come to expect the unexpected, many are re-examining their investment strategies. A strategy that has established a favorable track record is the Dogs of the Dow, which focuses on the selection of stocks from the Dow Jones Industrial Average (DJI) with dividends that are the highest fraction of their price. At the beginning of the year, investors using the Dogs of the Dow strategy will pick ten stocks from the thirty DJI components, based on their dividend yields, and will hold those stocks until the end of the year.
The theory behind the Dogs of the Dow is that over a period of time an investor who is annually reinvesting in high dividend yield DJI components should outperform the overall market. Likened by some to value investing principles, but with all the guesswork taken out of it, the Dogs of the Dow was made popular by Michael O’Higgins in 1991. Advocates of the strategy reason that the dividends of a blue chip component is a reliable measure of the average worth of the company because their dividend is not affected by fluctuations in trading conditions, unlike stock prices which are subject to the ebb and flow of the business cycle. Furthermore, companies with high dividends relative to price are thought to be near the bottom of their business cycle and headed for an upward swing. High dividend yield is also seen as an indication that the stock is oversold and that management has confidence in the future prospects of the company. Dogs of the Dow assumes that the dividend price is a reflection of the company size, as opposed to the company business model, and that companies have a natural repeating cycle with good performances being predicted by bad performances. These assumptions may have held true in the past, but in the current economic turmoil, time will tell if the Dogs of the Dow will remain a reliable investment strategy.
Current Dogs of the Dow are: Bank of America, General Electric, Pfizer, DuPont, Alcoa, AT&T, Verizon, Merck, JP Morgan Chase and Kraft Food. The remaining Dow Jones Industrial Average components are: 3M, American Express, Boeing, Caterpillar, Chevron Corporation, Coca-Cola, ExxonMobil, Hewlett-Packard, Home Depot, Intel, IBM, Johnson & Johnson, McDonalds, Microsoft, Procter & Gamble, United Technologies Corporation, Walmart and Walt Disney. General Motors and Citigroup remain components of the DJI – a situation which may change in light of their recent axing from the Global Dow.