Dogs of the Dow

The Dogs of the Dow: A Strategy for Investing in Blue-Chip Stocks

When it comes to investing in the stock market, there are countless strategies and approaches that investors can take. One popular strategy that has gained attention over the years is the “Dogs of the Dow.” This strategy focuses on investing in blue-chip stocks that have high dividend yields. In this article, we will explore the concept of the Dogs of the Dow, how it works, and whether it is a viable strategy for investors.

Introduction to the Dogs of the Dow Strategy

The Dogs of the Dow strategy is based on the idea that blue-chip stocks with high dividend yields are undervalued and have the potential for future growth. The strategy involves selecting the ten highest-yielding stocks from the Dow Jones Industrial Average (DJIA) at the beginning of each year and holding them for the entire year. The portfolio is then rebalanced annually to reflect the new highest-yielding stocks.

The term “Dogs of the Dow” was coined by Michael B. O'Higgins in his book “Beating the Dow” published in 1991. O'Higgins found that by investing in the highest-yielding stocks in the DJIA, investors could outperform the overall market.

How Does the Dogs of the Dow Strategy Work?

The Dogs of the Dow strategy is relatively straightforward. At the beginning of each year, investors identify the ten highest-yielding stocks in the DJIA. These stocks are considered the “dogs” because their high dividend yields indicate that they may be out of favor with investors.

Once the ten stocks are identified, investors allocate an equal amount of capital to each stock and hold them for the entire year. At the end of the year, the portfolio is rebalanced to reflect the new highest-yielding stocks in the DJIA.

The underlying assumption of the strategy is that high dividend yields are a sign of undervaluation. By investing in these stocks, investors are essentially buying them at a discount and positioning themselves for potential capital appreciation.

Case Studies and Historical Performance

Over the years, the Dogs of the Dow strategy has garnered attention from investors and analysts alike. Many have conducted studies to evaluate the performance of this strategy and its potential for generating returns.

One notable study conducted by Ned Davis Research analyzed the performance of the Dogs of the Dow strategy from 1973 to 1996. The study found that the Dogs of the Dow outperformed the DJIA by an average of 3.3% per year during that period.

Another study conducted by Michael O'Higgins himself examined the performance of the Dogs of the Dow strategy from 1973 to 1996. O'Higgins found that the Dogs of the Dow outperformed the DJIA by an average of 2.6% per year during that period.

While these studies suggest that the Dogs of the Dow strategy has the potential to outperform the market, it is important to note that past performance is not indicative of future results. Investors should conduct their own research and consider other factors before implementing this strategy.

Advantages and Disadvantages of the Dogs of the Dow Strategy

Like any investment strategy, the Dogs of the Dow has its advantages and disadvantages. Let's take a closer look at both:

Advantages:

• Simplicity: The strategy is relatively simple to understand and implement, making it accessible to a wide range of investors.
• Dividend Income: By investing in high-yielding stocks, investors can generate a steady stream of dividend income.
• Potential for Capital Appreciation: The strategy aims to identify undervalued stocks that have the potential for future growth, offering the possibility of capital appreciation.

Disadvantages:

• Market Timing: The strategy relies on timing the market by selecting the highest-yielding stocks at the beginning of each year. This can be challenging, as market conditions and stock performance can be unpredictable.
• Concentration Risk: By investing in only ten stocks, the strategy exposes investors to concentration risk. If one or more of the stocks perform poorly, it can have a significant impact on the overall portfolio.
• Transaction Costs: Rebalancing the portfolio annually can result in transaction costs, which can eat into potential returns.

Conclusion

The Dogs of the Dow strategy is a popular investment approach that focuses on investing in high-yielding blue-chip stocks. While historical studies suggest that this strategy has the potential to outperform the market, it is important for investors to conduct their own research and consider other factors before implementing this strategy.

Like any investment strategy, the Dogs of the Dow has its advantages and disadvantages. It offers simplicity, dividend income, and the potential for capital appreciation. However, it also involves market timing, concentration risk, and transaction costs.

Ultimately, investors should carefully evaluate their investment goals, risk tolerance, and time horizon before deciding whether the Dogs of the Dow strategy is suitable for them. It is always recommended to consult with a financial advisor or professional before making any investment decisions.