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The ‘Dogs of the Dow’ strategy uses a relatively straight approach of selecting and rebalancing the stocks within the Dow Jones Industrial Average whose dividend yield seems to be the highest. The Dow Jones Industrial Average is an index of the 30 most reputed companies in the world. The Dogs of the Dow, which is a variation of this strategy, became extremely popular during the early 1990’s as a means to beat the overall index. Since then, this investment method has shown impressive results, sometimes, even outperforming the S&P 500.
The proposition behind the choice of Dow Jones Industrial Average (DJIA) stocks with high dividend returns state that the selected stocks are almost near the bottom of their business cycle, and are most likely to have a higher price rise as compared to the lower yielding stocks.
The Dogs of the Dow is primarily a weighted average portfolio technique. It involves building a portfolio equally distributed among the top 10 companies of DJIA with highest dividend returns at the beginning of the year and redistributing this portfolio on a yearly basis to reflect changes in the 10 companies during the calendar year. For example, if you have a $100000 investment strategy, you will invest $10000 in each of these 10 companies of the DOTD list.
Barking up the right tree – Higher returns and Lower risks
This investment approach requires minimal efforts at the end of each year. Yet it has surpassed the Dow Industrial Average over the long-term, that too with much lower risk. The Dogs of the Dow (DOTD) have yielded a compound average of 14.30 percent as compared to 11.10 percent of the Dow Industrial Average stocks. Apart from the profitability factor, the Dogs of the Dow stocks have been relatively safer.
The successful implementation of this strategy however, requires you to hold all the indicated stocks for the entire year as certain individual stocks run the risk of losing significant value.
Why has the DOTD strategy worked?
Purchase of the corporate stocks of DOTD implies that you are essentially buying the inexpensive stocks in the DJIA, the companies that provisionally out of favor in the stock market, but still remain valuable companies. The hope is that the true value of these rock-bottom priced stocks will be realized, and you will be able to reap a good profit at the year-end by selling these stocks and purchasing the new ‘Dogs of the Dow’ stocks. When you buy new dogs during the next fiscal year, it infers that you are again purchasing stocks that are out of favor with the stock markets and waiting for them to rise.
However, the returns generated under the Dogs of the Dow strategy can be high only if the dividends are reinvested. Remember, this strategy is not short-term. If you wish the beat the market and bark up the right investment tree, patience is the key.
2013 Dogs of the Dow selection
The Dogs of the Dow started with a fairly good standing in 2012, but the final few laps were strenuous. The overall compounded return was 7.1 percent for 2012 vis-à-vis the 13.6 percent posted by the Dow Industrials. Though most of the stocks proved strong, the weighing down of returns of Intel and Du Pont resulted in lower returns.
The 2013 Dogs of the Dow list remain almost the same except two changes. Hewlett-Packard and McDonalds are the new entrants replacing companies such as Kraft and Procter & Gamble.
Overview
The Dogs are definitely not the most sophisticated and advanced investment strategies in the world, but it can definitely add value to the overall stock portfolio. It is always advisable to combine other investments with this strategy to peak yields. Remember that though the ‘Dogs of the Dow’ have been generating tidy returns, the stock market is a cycle of profits and losses. The DOTD is no different, and you should accept this fact as an investor.
