Dogs of the Dow

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Cute PuppyThe Dogs of the Dow is an investment strategy where, on the last trading day of the year, you buy equal dollar amounts of the ten highest dividend yield stocks in the Dow Jones Industrial Average. It’s covered extensively at the Dogs of the Dow website. If you like Lazy Portfolios, you’ll be a fan of this stock picking strategy. The basic idea behind the strategy is that you’re buying stocks that have been unreasonably battered by the market. The way you measure a “down and out” blue chip stock is by its inclusion in the Dow Jones Industrial Average and a high dividend yield.

Risks of Dogs of the Dow

Remember one thing, returns are never guaranteed and this is a “strategy” just like blindfolded monkeys throwing darts is a “strategy.” It has a history behind it and some logic, but there is never a guarantee! The biggest risk is that using dividend yield as a way of determining a good investment is always risky. You should never make decisions based on one metric, let alone dividend yield.

Another risk of picking Dow components with a high yield is that the company may cut its dividend. For example, the highest yielding stock of the Dogs is Bank of America with a 9% yield. If they were to cut its dividend in half, it would still make it on the list (Kraft, #10, has a yield a bit above 4%), but the stock price would sink. Does Bank of America have the cash to support its dividend? Will it continue to pay out the dividend even if it has cash? No one knows for certain. The best example from 2008 was Citigroup. They were the biggest Dog of the Dow last year with a yield of over 7%; this year they pay a dividend of ZERO (Same with General Motors, who was #3 last year).

Another risk is that stocks with high dividends often got there because their stock price fell a lot. A falling stock price is not a comforting thought and what is one person’s “beaten up stock” is another’s “wouldn’t touch it with a ten foot pole stock.” The argument against this is that the Dow components are all storied companies with a lot of history and a large market cap. The counter to that argument is a single point of the finger to AIG, which was removed on September 22nd, 2008 (replaced by Kraft). Stories change… and often quickly.

If you’re still sold on the idea, or are at least curious who the Dogs are this year, continue onward!

2009 Dogs of the Dow

So, which companies are this year’s dogs Dogs of the Dow? The 2009 Dogs of the Dow are:

  1. Bank of America
  2. General Electric
  3. Pfizer
  4. DuPont
  5. Alcoa
  6. AT&T
  7. Verizon
  8. Merck
  9. JP Morgan Chase
  10. Kraft

Don’t like the idea of buying ten different companies? There are two other alternatives:

  • Small Dogs of the Dow: Buy the five lowest stock prices from the ten Dogs of the Dow. (for 2009, they are Bank of America, General Electric, Pfizer, DuPont, and Alcoa)
  • Foolish Dogs: If five are too many, consider the Foolish Four. List the Ten Dogs and the Five Small Dogs side-by-side. If the same company appears at the top, exclude it; buy the four remaining.

Cute idea huh?

(Photo: cloneofsnake)

{ 3 comments, please add your thoughts now! }

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3 Responses to “Dogs of the Dow”

  1. Matt SF says:

    How about the Terrible Twos!

    JPM and BAC are the only real buys in that list for me. Can anyone say Government Backstop?

    I would wait until they pull back to their November 2008 lows.

  2. thomas says:

    You really are milking that puppy picture!

  3. Rewerb says:

    The “Dawgs” theory, like the Cleveland Browns football team.., only works over L o n g periods of time!!!
    It is not a SHORT TERM.., one year or two year
    approach to investing..
    Believe me.., I been doing this stuff for 38 years!!!

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