Dogs of the Dow Countdown – Week 1

One of the oldest and best investing systems around is the “Dogs of the Dow”. And it is simple to implement. On the last trading day of the year, you invest equal dollar amounts in the ten Dow stocks which have the highest dividend yield. Then you hold these ten stocks all year and repeat the process every December. Over time, even though there have been many bad years, this system has beaten the Dow’s performance by a wide margin. Now the Dow is an obsolete stock index which consists largely of supersized turkeys with little growth potential, but the Dogs of the Dow still works. Why? It incorporates several timeless principles for successful investing: everything else being equal, stocks which pay good dividends will outperform those which do not; it pays to invest in stocks which are out of favor; the end of December is a good time to pick up bargains due to year-end tax-loss selling; and over time, stocks provide an inflation-adjusted average annual return of 7% (see this post from the excellent blog, Crossing Wall Streetby Eddy Elfenbein).

This year’s buy date for the Dogs is Friday, December 29. Now that it is December we will study the list weekly. I already own all of these companies, either directly or through mutual funds, and it is not my intention to buy the whole list. (If I were more ambitious, I would have to start an ETF for the Dogs of the Dow!) But if conditions warrant I might increase my investment in selected names. Here are this year’s candidates in order of yield. Of course, the list may change during the next four weeks. I have added each stock’s beta to facilitate analysis.

Symbol Company Price Yield Beta
VZ Verizon 34.64 4.68% .92
MO Altria 84.00 4.10% .86
C Citigroup 49.38 3.97% .86
T AT&T 34.00 3.91% .87
PFE Pfizer 27.86 3.45% 1.04
MRK Merck 45.06 3.37% .48
GM General Motors 29.69 3.37% 1.50
DD DuPont 46.45 3.19% 1.12
JPM JP Morgan Chase 46.01 2.96% 1.08
GE General Electric 35.28 2.83% .84

My first observation is that since the market has reached such lofty levels this year, the stocks with betas greater than 1.0 should not be purchased unless a sharp market correction occurs by December 29. This rules out DD, which might be attractive otherwise. Among the remaining six stocks only GE looks even mildly interesting to me at these price levels.


4 Responses to “Dogs of the Dow Countdown – Week 1”

  1. The Dividend Guy Says:

    Good post. Just one comment however with regards to your observations. This strategy is supposed to take all emotions and “thought” out of investing. Thus, looking at beta and removing certain stocks based on other factors than those identified in the screen defeats the purpose of the strategy. That is what makes following these strategies so hard – it is really difficult to blindly purchase stocks based on no other analysis than a simple screen. However, I think the data shows us that simply sticking with the screen as it is more effective over the long terms.

    Thanks again for a good post.

  2. Alligator Investor Says:

    Your point is well taken. By failing to follow the strategy literally last year, I refrained from investing in GM, and missed out on the Dow’s best percentage gainer for the year.

    But each to his own! The Dogs of the Dow strategy is trying to beat the Dow, and I am trying to beat the Dogs of the Dow. 🙂

  3. Michael Weiss Says:

    Have you considered using foliofn to execute your dogs of the dog strategy. Just a thought. Michael

  4. Alligator Investor Says:

    You must mean:

    I wasn’t aware of this service but it does look interesting. Thanks for pointing it out.

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