January 28, 2003  Email this  Print this
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These Dogs Can Still Hunt
by Steven Goldberg  The Dogs of the Dow is one the simplest, most elegant ways to pick stocks. It also may be one of the best. All you have to do is sit down once a year and pick the top-ten yielding stocks from the 30 companies that make up the Dow Jones Industrial average. Put roughly equal amounts of money into each stock, and then repeat the process 12 months later.
(There are countless varieties of alternate Dogs of the Dow systems, but the original strategy is still probably the best one for most investors.)
The system is easy enough for many individual investors -- who may be defeated by more complex stock analysis -- to employ consistently over a long period of time.
Plus, the strategy, in practice for more than 25 years, has proven to be an effective way to invest in blue chip stocks.
James O’Shaughnessy went back and looked at what would have happened to a hypothetical investor who employed the Dogs of the Dow system from 1952 to 1996. An initial investment of $1,000 would have grown to $660,000 while the same amount invested in the S&P 500 would have grown to just $170,000.
Lost dogs
The theory behind the Dogs of the Dow is simple: The yields on Dow stocks become relatively large when those stocks fall out of favor. Since they are Dow industrials -- and thus, the bluest of blue chips -- the odds are that they will recover their luster and rise in price. Less solid high-yielding stocks, of course, may be headed for financial trouble.
The Dogs of the Dow became increasingly popular in the mid-1990s with the rise of online investing and the Internet, in general.
Unfortunately, the late 1990s marked a period when non-dividend-paying, large growth stocks beat the market. The Dogs of the Dow did relatively poorly, and many investors lost confidence in the system.
Investor’s best friend
But over the last three years, the Dogs of the Dow have beaten the Dow as a whole. With the newfound popularity of dividends, that trend may well continue.
Even if it fails to deliver over a year or two, the system has proven its mettle over the long term. It makes sense for your large-cap, value-oriented stock money.
The unofficial keeper of the flame (or should we say the bark) is DogsoftheDow.com, which offers insights into the strategy. Given the costs of trading, it’s best to implement a program like the Dogs of the Dow through a low-cost online broker, such as Scottrade.com.
A number of brokers offer unit trusts that invest in the Dogs of the Dow stocks -- although check the costs on these carefully. For all but the smallest investors, it’s probably cheaper to do it yourself.
This year’s dogs and their yields are:
- Philip Morris, now Altria, (MO) 6.1%
- JP Morgan Chase (JPM) 5.2%
- General Motors (GM) 5%
- Eastman Kodak (EK) 4.7%
- SBC Communications (SBC) 4%
- DuPont (DD) 3.3%
- General Electric (GE) 3.1%
- Honeywell (HON) 3%
- Caterpillar (CAT) 3%
- AT&T (T) 2.9%.
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