TheStockAdvisor Advice

Dogs of the Dow

The "Dogs of the Dow" is simply a common name given to a particular investment strategy, perhaps it should be subtitled the "Lazy Man's Way to Riches". "The Dogs of the Dow" have been very effective in beating the market over the long term and are a viable option to those investors unable to manage their portfolios on a daily basis.

It works like this; As you are aware the Dow Jones Industrial Average is comprised of thirty of the biggest companies in America and the bluest of the blue chips, the most famous index in the world. The strategy is to pick the ten stocks with the highest dividend yield in comparison to its stock price and invest an equal dollar amount in each stock.

Let’s apply our formula to General Electric as an example. GE trades around $40 a share with an annual dividend of .72 a share. If you divide .72 by $40 you come up with .018 as your dividend yield. Continue this process for the remaining twenty-nine stocks in the Dow, then take the ten with the highest dividend yields as your "Dogs".

In essence you are buying a basket of beaten down stocks and forgetting about them for a year, no more checking your stock quote every fifteen minutes. Because this automated process has beaten the market year over year, your putting faith in the reliability of the past performance. There have been years, although few and far between, where the "Dogs" have under performed the market but hey, there are no guarantees in life right?

There are minor variations of the "Dogs of the Dow", and you may decide to work with less than ten, take the top five for instance. Of course, if the profits look too good at any given time you are free to sell before your year is up but discipline is strongly encouraged when using this approach. There is some debate as to what time of the year to start you portfolio, with some saying timing is irrelevant and others saying you should end your annual cycle in December/January. Personally, I wouldn’t want to be doing what everyone else is doing. Why would you want to buy and sell your portfolio the same time everyone else does? You will likely overpay for the stock on the way in and undersell on the way out.

The dividend information and share price are readily available in any major newspaper on a daily basis. Once you have invested an equal amount in your "Dogs", you will need to rotate your portfolio basket on an annual basis by dropping those that no longer qualify as "Dogs" and picking up those that are. This can go on in perpetuity. Get it? Got It? Good! Take Fido for a walk.


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