It’ is hard to believe that another summer has almost passed us by. Unfortunately, in southwest Montana, the realization that we are in the midst of the “Dog Days of Summer” is signaled by smoke in the sky from the numerous forest fires still burning in the Pacific Northwest, cooling temps and the abrupt end to our watersport activities. On the bright side, hunting season is just beginning and fishing season is still in full swing! On top of that, skiing and snowmobiling seasons are just around the corner.
With that in mind, I thought it would be an opportune time to share the basics of a proven long-term equity market investment strategy known as the “Dogs of the Dow.” Because the Dow Jones Industrial Average is one of the oldest and most widely followed indexes in the world and generally considered a barometer for the broader equity markets, it is not uncommon for market strategists to base investing techniques on some components of the DJIA.
The Dogs of the Dow is a well-known investment strategy first published in 1991. The methodology attempts to beat or at least keep pace with the performance of the DJIA. Determining the Dogs of the Dow for each new year is easy: Simply rank the DJIA 30 stocks by dividend yield and take the top 10 yielding stocks. The strategy has investors buy equal amounts of all 10 stocks at the beginning of the year and then hold them through the end of the calendar year. Then the following year, if the yields have changed, you sell the stocks that have dropped out and buy the new qualifying stocks, thereby rebalancing your positions to the 10 new highest yielding DJIA stocks. It is important to recognize that all 10 will not likely change from year -to year.
It’s noteworthy that this strategy beat the DJIA index during the 10-year stretch that followed the 2008 financial crisis known as The Great Recession. Dogs of the Dow relies on the premise 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. In contrast, the stock price does fluctuate throughout the business cycle.
This should mean that companies with a high dividend relative to stock price are near the bottom of their business cycle, so their stock price likely would increase faster than companies with low dividend yields. In this scenario, an investor reinvesting in high-dividend-yielding companies annually could outperform the overall market.
There are many ways to purchase these securities. You can hand-pick individual stocks and build your own portfolio; invest directly in the Dow through exchange-traded funds; or instead of investing in the entire Dow, you can follow the Dogs of the Dow strategy, whose stocks offer better yields than the Dow as a whole. Oftentimes, the Dogs have been able to outperform the Dow over the course of the year. So I guess even when you’re in the dog house you can still find ways to Enjoy the Ride!
