{"id":966,"date":"2010-10-16T20:52:36","date_gmt":"2010-10-17T00:52:36","guid":{"rendered":"http:\/\/thestockmarketwatch.com\/learn-stock-market\/?p=966"},"modified":"2016-04-26T14:42:12","modified_gmt":"2016-04-26T18:42:12","slug":"stock-picking-strategies-dogs-of-the-dow","status":"publish","type":"post","link":"https:\/\/www2.stockmarketwatch.com\/learn\/stock-picking-strategies-dogs-of-the-dow\/","title":{"rendered":"09) Stock Picking Strategies: Dogs of The Dow"},"content":{"rendered":"

The Dogs of The Dow are 10 of the 30 companies in the Dow Jones Industrial Average (DJIA) that has the highest yield in dividends.\u00a0 This form of strategy was popularized by Michael Higgins’ book “Beating the Dow”. People like this strategy for its simplicity.\u00a0 Basically, people work their portfolio around these ten companies so that it is always equally allocated to these ten.<\/p>\n

That Simple?<\/strong><\/p>\n

Yes.\u00a0\u00a0 Investors who follow this strategy reassess the companies in the DJIA every year.\u00a0 Once the highest yielding companies in terms of dividends are identified, your broker can make changes in your portfolio in accordance to the DJIA list.\u00a0 You then hold on to these stocks for a year and then repeat the process at the end of the calendar year.\u00a0 Usually, there will be two or three companies that are dropped from the DJIA so your portfolio will need to be realigned to the 10 stocks.<\/p>\n

There have been instances where the Dow has beaten the Dogs, so this is usually a long term investment strategy.<\/p>\n

The Premise<\/strong><\/p>\n

In theory, out of favor stocks from the DJIA are still good investments because once the market rebounds, these stocks can be revalued and resold and you can replenish them with other companies that have fallen out of favor.\u00a0 Companies that make the DJIA are usually solid companies that have solid balance sheets.\u00a0 They are known to be stable despite market decline.\u00a0 Because the Dow is known for people who really know what they are doing, you can rest assured that the DJIA list is made up of good strong companies.<\/p>\n

The Numbers<\/strong><\/p>\n

The strong point of the Dog of the Dow strategy is its simplicity.\u00a0 Over the years, the Dogs have outperformed the Dow by an average of 3%.\u00a0 From 1957-2003 The average rate of return for the Dogs as at 14.3% annually compared to the Dow\u2019s 11%.\u00a0 During 1973-1996 the Dogs gave returned 20.3% to investors annually while the Dow averaged a measly 15.8%.<\/p>\n

Variations<\/strong><\/p>\n

Because it is simple, several clones of the Dogs of the Dow have been formulated.\u00a0 A variation called Dow 5 includes the 5 Dogs with the lowest per share price.\u00a0 Dow 4 is the 4 highest price of the Dow 5.\u00a0 And then there\u2019s the Foolish 4 wherein you choose the same stocks as the Dow 4 but allocates 40% to the lowest priced of these 4 companies and 20% to the three other stocks.\u00a0 All of these variations aim to refine it, to make it simpler and to make it yield higher results.<\/p>\n

These variations were developed from old data or back-testing.\u00a0 There is no way of knowing that the Dogs will outperform the Dow every year.<\/p>\n

Before you go out and apply these strategies, remember that while picking high yielding stocks makes sense, picking strictly on price is odd.\u00a0 Share price is relative and a company can split its shares and still be worth the same amount.\u00a0 They will simply have twice as many shares as before with half the share price.\u00a0 With this kind of strategy, there are more questions rather than answers.<\/p>\n

Not Certain<\/strong><\/p>\n

Remember that this strategy, is not 100% fool-proof.\u00a0 It assumes that the same circumstance that happened during the mid 20th<\/sup> century will repeat itself during the 21st<\/sup>.\u00a0 If this is true, then the Dogs will give investors an average of 3% return compared to the Dow.\u00a0 But again, this is not guaranteed.<\/p>\n

Conclusion<\/strong><\/p>\n

The Dogs of the Dow strategy is very simple.\u00a0 You pick the top 10 highest yielding stocks off the top 30 list of the DJIA and weigh your portfolio equally among them.\u00a0 Adjust your portfolio annually and expect a 3% rate of return per year should the Dogs outperform the Dow.\u00a0 This is if history repeats itself.<\/p>\n