Financial Planning, Retirement Plan, 401k, Investment Blog

Financial Planning, Retirement Plan, 401k, Investment Blog

Dogs of the Dow- Investing Strategy That Needs to be Retired?

Posted June 21, 2009 by Bernz

I was doing some research online about stock investing two days ago and came across this strategy and thought I should share my insights with my readers.

The Dogs of the Dow is an investing strategy first promoted 35 years ago by Michael O’Higgins, a fund manager who now runs his own firm. The strategy calls for choosing the 10 stocks in the Dow 30 index that have the highest dividend yields at the end of the year. You hold these stocks until the end of the following year when you re-balance your portfolio based on the new Dogs. A dividend yield is calculated by dividing the dividend by the stock’s price. Therefore, the stocks with the highest dividend yields have the lowest stock prices and may be ready for a jump.

Because all of the stocks in the Dow 30 are large cap, stable companies, the Dogs of the Dow strategy states that the companies chosen are likely to be solid in bad times and rise quickly in price in good ones. 2009’s Dogs are: Alcoa, AT&T, Bank of America, DuPont, General Electric, JPMorgan Chase, Kraft, Merck, Pfizer, and Verizon.

The Dogs didn’t fare so well in 2008. The Dow fell around 32%, the S&P 500 dropped 37% and the Dogs tumbled 38%. Overall, however, since 1972, the Dogs have outperformed both indices.

The current markets, though, are markedly different from any we have seen in the past 35 years. All companies are hurting as the word “depression” continues to be tossed about. Many companies that have weathered every downturn in the past hundred years are foundering. Dividends are being cut as cash and liquidity dry up and a dividend-based strategy may no longer make sense. Companies that pay dividends despite the need to conserve cash may prove to be risky investments, regardless of their long history of stability.

While the simplicity of the Dogs of the Dow strategy appeals to investors who do not want to be monitoring and adjusting their portfolios on a regular basis, the current market meltdown may make this strategy obsolete. The best strategy is to review each stock’s fundamentals and make your picks based on solid balance sheets and liquidity.

Let me know what you all think of this strategy.

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2 Responses to “Dogs of the Dow- Investing Strategy That Needs to be Retired?”

1. 
   Ned Carey Says:
   June 23rd, 2009 at 9:13 pm

   I’m not sure it is a good idea to abandon the strategy just because it didn’t work in one tumultuous year. Good investing is about having the discipline to stick to your strategy even when things don’t look good.

2. 
   RateNerd Says:
   July 11th, 2009 at 6:40 pm

   do you invest in long short funds? supposed to cover your downside by investing in shorts. your thoughts? http://ratenerd.com/long-short-hedge-fund-now-mutual-fund-1456

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