Does The Dogs Of The Dow Investment Strategy Still Work?

dow jones today

Dow Today - A funny thing occurs on January second of each year. Hundreds and thousands of investors wake up and run to their computer like it’s Yuletide morning. They’re in a huge rush to do a few fast calculations and determine their investment strategy for the new year. Based totally on this little of maths they blindly make all of their investment choices.

It is a straightforward method. With a tactic based mostly on the stocks that make up the DJX Industrial Average, these stockholders are on the lookout for high dividend yields. Their hope ( like extraordinarily investor ) is to outperform the market.

So, what system am I talking about?

The ‘Dogs of the Dow’ investment speculation of course. In 1991 Michael O’Higgins published a book called’Beating the Dow.’ Michael, according

To his very own biography, is widely considered one of the finest investment executives in America. He started on Wall Street in 1971 and founded his own money management firm in 1978. In this book he put forth a very simple methodology of purchasing the ten DJX stocks with the highest yields.

Over the long term, say fifteen years, the Dogs of the DJX plan had outperformed not just the DJX industrial Average, but the S&P 5 hundred as well . Sounds great, huh?

The difficulty. It does not work so well anymore.

In the last five and ten year periods, the technique actually underperformed the market. In the go-go days of the internet, folk were less concentrated on standard businesses that paid dividends. As a consequence, the strategy failed to beat the averages. Further, in 2004 and 2005, the strategy failed again - unhappily.

Then in 2006 the strategy performed well, outperforming by 10%. This, sadly, brought replenished life to the Dogs of the DJX.

In 2007 the results were again unimpressive. The top ten companies chose this year included : Pfizer, Verizon, Altria, AT&T, Citigroup, Merck, General Motors, DuPont, General electrical, and JP Morgan Chase.

A basket of these stocks, one share each, would have cost roughly $427.50 and you’d be able to sell them today for $424.12. Including dividends the strategy returned a measly 3.5%.

The Dow in total is up this year just about 7%. Not including dividends.

Just making an investment in the DJX outright would have produced better results than following the’Dogs’ system. Why did the results in 2007 fail so miserably after such a good 2006? You can at once tie the poor results this year to 2 stocks Citigroup ( C ) down 47% and General Motors ( GM ) down 17%.

A wolf in sheep’s clothing?

In truth this famous trading technique is a simple one. It is a very basic price method. These stocks are traditionally trailing the market but still have great businesses with some inherent value. On the whole, they tend to be out of favor for some reason. This makes them value plays. Ah, but we all know value investing tends to time…sometimes more than 1 year.

And right now, the market is favoring growth stocks.

So here we are at the last trading day of 2007. Tomorrow, a new batch of stocks get selected for the Dogs of the Dow and stockholders across the globe start their investing technique all over again.

I recommend you leave the ‘dogs’ to some other person.

Resist the urge to choose stocks only on one information point - it will save you plenty of pain down the line. Study the strategic reasons for each investment rather than blindly following a general method.

You shouldn’t just sell or buy a stock just because of its yield, try to grasp the company and its industry. With a small additional research I truly believe savvy stockholders can beat the market over the short and long term.