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Dogs of the Dow is a stock picking system that has been reported on periodically in the popular press. The Dow Jones Industrials, or Dow 30, represent thirty gigantic companies such as Exxon, IBM, ATT, DuPont, Philip Morris, and Proctor & Gamble. From time to time, some companies are dropped from the Dow as new ones are added. By investing in stocks from this list, you know you're buying quality, well established companies. The idea behind the "Dogs of the Dow" strategy is to buy Dow companies with the lowest P/E ratios and highest dividend yields. By doing so, you're selecting those Dow stocks that are cheapest relative to their peers. If you want to use this strategy, here's what to do. At the beginning of the year, buy equal dollar amounts of the 10 Dow stocks with the highest dividend yields. Hold these companies exactly one year. At the end of the year, adjust the portfolio to have just the current "dogs of the Dow." What you're doing is buying good companies when they're temporarily out of favor and their stock prices are low...and selling them after the price recovers. A valid contrarian technique. The trouble is that this technique requires a long term buy and hold strategy, and a lot of guts. You're going to watch your portfolio go up and down and lose money some years. You may have years at a time where you are doing worse than the markets. That's going to be a major pain in the ass and most people won't be able to take the pressure. They'll freak out and run screaming to mama. If you are planning to check the prices of your stocks every day, you won't sleep well at night. The way this thing works is in the long term. Eventually all those ups and downs average out to a really good return. If you want an even better return, use only the 5 cheapest of the 10 Dogs of the Dow stocks. This technique has pulled down an impressive 20.9% average annual return since 1973. Here's how this strategy has performed over the last few years. It's okay, don't worry, I know it hurts, but look at the chart anyway:
As you can see, you'd be flipping your lid in most of the last few years. You'd be wondering why you listened to some guy on the internet when you could have just plunked all your cash into and index fund. If that's not enough, now the Dow people are adding tech stocks that pay teeny tiny dividends. This strategy is based in large part on large dividends being paid, and with the additions of Microsoft, Intel, and Home Depot in 1999, this strategy may no longer be a viable investment vehicle. Hennessy seems to be having a little trouble with this strategy. They've been at it since 1998 with little luck. Hennessy also tries using the ideas of James O'Shaughnessy with some success in their Cornerstone Growth fund. However, they've modified his formulas significantly, in my opinion, and don't mention James on their website as far as I can tell. To learn more: |
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