“Dogs of the Dow” is simply a common name given to a particular investment strategy, although perhaps it should be subtitled the “Lazy Man‘s Way to Riches." "The Dogs of the Dow" strategy has been very effective in beating the market over the long term and is 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 30 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 10 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 (NYSE: GE, Stock Forum) as an example. GE trades around $19 a share with an annual dividend of $1.24 a share. If you divide 1.24 by $19 you come up with .065, or 6.5% as your dividend yield. Continue this process for the remaining 29 stocks in the Dow, then take the 10 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 15 minutes. Since this automated process has beaten the market year over year, you’re putting faith in the reliability of the past performance. There have been years, where the "Dogs" have under performed the market but, hey, there are no guarantees in life, right?
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.
There are minor variations of the “Dogs of the Dow,” and that it what we are working with today. We have decided to work with less than 10, take seven for instance. We threw away two financials and Verizon. Of the current 10 Dogs, here are the ones we like (the prices are as of midday Tuesday 11/11/08):
Pfizer – PFE; $16.20
General Electric – GE; $17.55
Alcoa – AA; $10.87
AT&T – T; $27.22
DuPont – DD; $28.651
Merck – MRK; $27.35
Catepillar – CAT; $37.18
Dividend information and share price are readily available 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.