The Dogs of the Dow

According to The Dogs of the Dow investment strategy popularized by Michael O’Higgins in 1991, an investor should annually select for investment the ten Dow Jones Industrial Average stocks whose dividend is the highest fraction of their price.

Investing in the Dogs of the Dow is relatively simple. After the stock market closes on the last day of the year, of the 30 stocks that make up the Dow Jones Industrial Average, select the ten stocks which have the highest dividend yield. Then simply get in touch with your broker and invest an equal dollar amount in each of these ten high yield stocks. Then hold these ten "Dogs of the Dow" for one year. Repeat these steps each and every year. That's it!

Some of you may be interested in trying to outperform even the traditional Dogs of the Dow. Well, we have a way that historically has done just that. On the last day of any given year, select the ten highest yielding stocks as you normally would. Of these ten Dogs simply select the five Dogs with the lowest stock price and you will have what we call the Small Dogs of the Dow (Sometimes referred to as the Puppies of the Dow or the Flying Five). Then get in touch with your broker and invest an equal dollar amount in each of these 5 high yielding, low priced stocks. Then hold these five "Small Dogs of the Dow" for one year. Investing in the Puppies of the Dow would have resulted in a 20.9% average annual return since 1973! (As reported in U.S. News & World Report, July 8, 1996).

Proponent of the Dogs of the Dow strategy argue that blue chip companies do not alter their dividend to reflect trading conditions and, therefore, the dividend is a measure of the average worth of the company; the stock price, in contrast, fluctuates through the business cycle. This should mean that companies with a high yield, with high dividend relative to price, are near the bottom of their business cycle and are likely to see their stock price increase faster than low yield companies. Under this model, an investor annually reinvesting in high-yield companies should out-perform the overall market. Of course, several assumptions are made in this argument, first, that the dividend price reflects the company size rather than the company business model and second, that companies have a natural, repeating cycle in which good performances are predicted by bad ones.