Dogs of the Dow

Dogs of the Dow

A lot of people have approached me in the past few weeks regarding the dogs of the dow - a popular investment strategy. A lot of people struggle sticking to a particular investment strategy and thesis which causes them to invest in many different assets and holdings and end up with a portfolio resembling a Jackson Pollock masterpiece. The strategy popularized in the 1990’s looks at the Dow Jones Index which is made up of 30 large-cap US companies. The dow comprises companies from many different industries; spanning from pharmaceuticals to apparel and financials to technology stocks.

What is the DOW?

The Dow is a price-weighted measure of 30 US blue chip companies spanning all industries except transportation and utilities. The Dow is comprised of quality, industry heavy-weights, dividend paying companies. The components within the dow are not fixed and should a company fall out of favor or encounter significant obstacles they are switched out.

The Strategy: The strategy consists of looking at the Dow on an annual basis and purchasing the stocks with the highest paying dividend yield.

The dividend yield is calculated as the dividend payment (annually) divided by the price of the stock. The yield is not a fixed amount and fluctuates with the price of the stock and with the dividend payment amount.

What about the golden rule of not chasing dividend yields?

The reason why this strategy is effective is because the Dow has very reputable companies with solid operations. Despite falling out of love with investors - they generally return to normal as markets and investors re-evaluate the companies. Companies usually fall out favor due to oversold conditions, cyclical market conditions and/or temporary factors. However, just because a component is part of the DOW does not guarantee it will bounce back so additional research is always required.

Are there any drawbacks with this strategy?

Like any strategy, there is no guarantee that it will work. There is no guarantee that the dogs of the dow strategy will outperform the dow overall. Over the last ten years, the Dow index has outperformed the Dow in the past 6/10 years.

Can this be applied to other indices?

Yes of course, the strategy could be applied to other indices but it is important to realize this strategy is based on the dividend yield. The strategy is also very closely linked with the Dow components because the Dow is unique in the sense that it has very reputable and strong companies with solid operational foundations. While other indices also have reputable companies some of the companies listed do not have a dividend.

Disclaimer: All of the above information is my own personal opinion. Please consult with a licensed representative and do your own research before making any investment decision. Past investment results are not indicative of future results.

Thumbnail Image: TSI Investing


Time to Rebalance?

Time to Rebalance?