The Dogs of the Dow Investment Strategy

By Stock Research Pro • October 19th, 2008

Under the dogs of the Dow investment strategy, the investor selects the Dow Jones Industrial Average stocks whose dividend is the highest fraction of their price. Proponents of this strategy believe that the list of stocks should be re-visited and adjusted annually to pick the top ten stocks that meet these criteria.

The Dogs of the Dow investor seeks to buy high-quality companies that are temporarily out of favor. After holding onto them for a year, these stocks will have (hopefully) rebounded, so they can be sold for a profit and the new batch of “dogs” can be purchased.

The Dividend Factor

The idea behind the Dogs of the Dow strategy is that these blue chip companies will not adjust their dividend payments to reflect current market price, making the dividend a marker for the value of the company as the price of the stock fluctuates with the business cycle. The belief, then, is that companies with a high yield (a high dividend relative to price) are simply enduring the low-end of their business cycle and are more likely to see a rapid increase in their stock price than lower yield companies.

One of the arguments for this strategy is the downside protection it affords. If the stocks drop in price, the losses are smaller because of the dividends collected over the year. It is also seen as non-emotional and mechanical approach to stock market investing.

Dogs of the Dow Historical Performance

The Dogs of the Dow strategy was made popular by the Michael O’ Higgins book, “Beating the Dow,” published in 1991. The author demonstrated from 1973 to 1989, the strategy averaged a return of about 17.8% annually, as opposed to 11.1% for the Dow.

While the Dogs of the Dow strategy has beaten the S&P 500 more times than not over the years, the strategy has not been foolproof. It did not, for example, fare well during the technology boom of the late 1990s.

More recently, Dogs of the Dow investors saw good results in 2006 gaining 24.8%. However, the 2007 dogs delivered a loss of 1.38%, significantly underperforming the Dow Jones Industrial Average.


The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax advisor.


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