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Stock Picking Strategy: Dogs of the Dow

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 [3]” 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.