While the name may sound strange, the dogs of the Dow is an investment strategy popularized by Michael B. O'Higgins in 1991. The strategy proposes that an investor yearly select for investment the ten Dow Jones Industrial Average (DJIA) stocks with the highest dividend yield at the beginning of the year and equally invest in these “dogs”.
In an article published by CNBC on October 18th, 2016, the dogs of the DJIA were topped by Verizon, Chevron, Caterpillar, Exxon Mobil and IBM. The stocks generated an average total return of 18.3 percent according to a CNBC analysis of FactSheet.
Select the ten stocks from the Dow Jones Industrial Average, with the highest dividend yield. Equal amounts of money are invested in each of the stocks and the investor holds on to these stocks for a whole year. The process is then repeated annually with the portfolio being rebalanced each year because some of the dogs may drop out of the top ten.
Deviations from the main idea have cropped up. For example, out of the top ten dogs, one may choose the bottom five companies and equally invest in their stocks, then hold on to them for the year. These companies are referred to as the “Puppies” or “The Small Dogs of the Dow”. An investor could also choose to concentrate on the top four or five companies depending on their preference.
This is a long term investment strategy and therefore calls for patience. Remember that this strategy has been in existence for a while. Companies that are in the DJIA are established and can weather hard economic times. Choosing to invest is obviously a risk, but with established companies, it is definitely a risk worth taking.
While some may argue that companies could easily alter their dividends to become part of the dogs, well-established companies will rarely cut their dividends unless they are really suffering. A cut in dividends will negatively effect their stock price, giving investors an opportunity to purchase their stock at low levels and wait for the stocks price to rise.
According to Benjamin Graham, in the “Intelligent Investor” (1949), large companies never go broke. They have periods of success and struggle. The Dogs strategy allows investors to find the “struggles”, purchase stocks, then wait for the “success” of higher returns.
Generally, there is no assurance that the Dogs will work or fail. Therefore, it is wise to consult before making purchases. However, investment is about taking risks. When investing in the Dogs, it is imperative to get used to the dog’s life to avoid frustrations.