Stock Picking Strategy: Dogs of the Dow

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Now that I have a little more in terms of savings to put towards investments, I’ll begin investigating the various stock picking strategies out there and the first one I’ll take a look at is called Dogs of the Dow. I chose this one as the first one I took a look at because it’s really really easy.

Origins: The origins are hazy but it was definitely made popular by “Beating the Dow” written by Michael O’ Higgins.

Strategy: Pick the ten companies, of the thirty in the Dow Jones Industrial Average, with the highest dividend yields and invest evenly in all ten. At the end of the year, re-balance your portfolio so that you once again hold the ten companies with the highest dividend yields. There are a few variations on that strategy using the same basic concept of the ten Dogs and then just filtering those down. It’s also worth mentioning that this is a Contrarian Strategy, that is you’re picking stocks that are down and out, going contrary to the market.

Part of the reason why this theory works is because the stocks that have the highest yield usually have been seeing some tough times and depressed share prices due for a correction, so you buy when they’re down and out (and still have the benefit of the dividend). Then, at the end of the year, if they appreciated quite a bit, such that they fell out of the list of the top ten dividend yield stocks, you’d sell high and buy the low priced stocks again.

Track Record: From 1957 to 2003, the Dogs of the Dow averaged an annual rate of return of 14.3%. During that same period, the Dow as a whole averaged only 11%, a difference of 3.3%. From 1973 through 1996, the Dogs of the Dow averaged an annual rate of return of a whopping 20.3% compared to the Dow’s run of “only” 15.8%. While on a year by year basis the Dogs could potentially lag the Dow, this is a long term strategy so it relies on time to even out the returns.

{ 9 comments, please add your thoughts now! }

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9 Responses to “Stock Picking Strategy: Dogs of the Dow”

  1. BeefStooge says:

    Didn’t the Motley Fool promote this strategy a while back (mid to late nineties)? I followed it for a while, and if I recall they ended up ditching it because there was some issue with the calculation of the return rates. I’m probably completely wrong, but I seem to remember this or something like it there.

  2. jim says:

    What disciplines do you follow?

  3. Jim, if you are interested in buying dividend based stocks, pick strong companies that have a history of increasing their dividends annually. Stingy Finance has an article on this:

    Best of luck!


  4. Star Money Articles for the Week of Jan. 8

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  5. Jose says:

    I do take in consideration the dogs of the dow strategy. I look at which companies are in the dogs list and study them. I tend to choose from them if I do believe they are financially solid.

    I do not invest blindly on them… but I do consider them as good candidates.

  6. young says:

    Hmmm…stick with value investing for me!

  7. Mike says:

    I don’t pick stocks. I think mutual funds, primarily low expense ratio, no load index funds are better than most stock picking “strategies” I might use. You’re guaranteed market returns that way, they’re tax efficient when you’re investing in non-retirement accounts, and it takes absolutely zero time and effort to “research” and “manage” my portfolio.

  8. Weekly Roundup – 01/12/07

    Here’s a quick look at some of the personal finance related articles that caught my eye over the past week…

    Jim profiles the “Dogs of the Dow” stock picking strategy.
    Flexo thinks that we should forget about “The Latte F…

  9. CreditShack says:

    Motley Fool quit the “Foolish Four” method (which involved buying Dogs of the Dow stocks 2 through 5) because they attracted so much attention to the strategy that it quit working.

    Backtesting shows that the Dogs of the Dow strategy beat the DJIA. I’d be interested in knowing if buying the Dogs of the Dow in year 1 and then holding them permanently, instead of rebalancing annually, beat the Dogs strategy. Rarely does a trading strategy beat a sound buy-and-hold strategy.

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