What are Dogs of the Dow?
Dogs of the Dow is an investment strategy in which an investor aims to select a total of ten Dow stocks (known as Dogs) which have the highest dividends yields. The purpose of the strategy is to generate the highest yields for the investors by choosing those stocks that provide high dividend yields.
The strategy was brought into existence by Michael B. O’Higgins in the year 1991 and the same was published in a book written by him named “Beating the Dow”. The same was also uploaded later on over the official website of Dogs of the Dow. The strategy suggested that if ten such stocks are chosen that provide the highest dividend yields; the overall performance will beat even the Dow index.
How Does it Work?
- This strategy is based on the argument that those companies of Dow Index which issue blue-chip stocks are better able to survive in the difficult economic and market conditions and maintain their dividend payouts in such conditions.
- As a result, they tend to outperform the entire stock market. Accordingly, such stocks are said to be better indicators of the investments’ worth. The stock prices do fluctuate based on the market and business conditions.
- However, for such stocks, the prices are expected to increase faster than those stocks with low dividend yields in the inadvertent business conditions. This is why the dogs are able to perform better than the overall market when the results of the entire year are combined.
- In the strategy, an investor selects the top 10 stocks of the Dow Index in terms of dividend yield, as at the end of the year-end.
- On the very first of the day of the next year, the investor makes the investment in those stocks. The investments are held for a whole one year and the same process is repeated each year so as to rebalance the positions that are to be taken in order to maintain the holding in fresh stocks that meet the criterion.
Let us consider an example, wherein an investor wants to make a total investment of $20,000 in the stocks, using the Dogs of the Dow strategy. Now, since 10 topmost stocks with the highest dividend yield are to be chosen, the amount that the investor would need to invest in each such stock comes to be $2,000 (i.e. 20,000/ 10). This is known as equal price weightage as an equal investment is made in each stock irrespective of their prices.
Current Dogs of the Dow
Now, have a look at the list of stocks that form part this in the year 2020.
The strategy is being criticized by some analysts due to the following facts.
- It uses equal weightage for all stocks and instead price weighting shall be used in its place, and when price weighting is applied the dogs give less return that that of Dow index.
- The strategy doesn’t account for many important factors such as dividend-payout ratio, price performance, and so on.
The investment strategy offers the following advantages to its followers.
- The strategy is very simple to apply as there is no complexity in its application.
- The topmost performing stocks are considered in the strategy, with respect to dividend yield and they help an investor earn higher returns.
- The strategy doesn’t involve any assumptions and thus it is based on actual and reliable data.
The strategy suffers from the following limitations.
- Equal price weighing is used which gives equal weightage to all the stocks instead of giving weightage to the prices of the stocks while making investments.
- Also, as mentioned earlier the strategy is way too simple and does not take into account important and complex factors.
The strategy is very simple in its application and doesn’t need any assumptions to be made. Thus, an investor can easily make use of this investment strategy to earn higher returns on the Dogs.
This has been a guide to what is Dogs of the Dow. Here we discuss examples, criticisms and how do dogs of the dow work along with advantages and drawbacks. You may learn more about financing from the following articles –