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The Dogs of the Dow: Interesting share strategy, but does it work here?

- March 10, 2023 4 MIN READ
The Dogs of the Dow investment strategy

I read about an interesting sharemarket strategy during the week which got me wondering whether it could apply to the Australian market – it’s called The Dogs of the Dow.

The Dow Jones Industrial Average, known as the Dow, is a US stockmarket index made of 30 large US blue chip companies which are well-established with a long history of consistent growth and earnings. Household names like Coca-Cola and Apple.

What is Dogs of the Dow?

The Dogs of the Dow is an investment strategy that invests in the top 10 dividend yielders of those 30 Dow Index stocks.

In his 1991 book, Beating the Dow, Michael O’Higgins detailed a contrarian market strategy: if investors selected the ten Dow components with the highest dividend yields, and then invested only in these ten components each year (rebalancing their portfolios at the start of a new year), they could often beat the performance of the Dow Index itself.

O’Higgins’ rationale was that for some reason, such as a negative news report or earnings miss, the stock was in the ‘Doghouse’ – its share price had fallen which pushed up its dividend yield.

But being a strong blue chip stock they would bounce back from the setback over the next year. Savvy investors who understood this could buy shares at a temporary discount and enjoy a handsome dividend to boot.

How it works

On the first trading day of the next year, you would invest evenly in all ten Dogs. That means if you had $10,000 to invest, you would allocate $1,000 to each. The strategy also requires investors to sell those stocks that are no longer considered Dogs and reinvest their proceeds in the ten current Dogs of the Dow each year.

According to data from the Dogs of the Dow website, which has tracked the strategy since 2000, the Dogs of the Dow have outperformed the Dow, S&P500 and even index funds like Vanguard 500 and Fidelity Magellan.

Remember, there are tax consequences to rebalancing and reallocating an investment portfolio on a yearly basis, so make sure you understand the CGT and income tax consequences of rebalancing.

But it is an interesting theory, so I thought I’d start a Dogs of Downunder fantasy portfolio and monitor it throughout the year. I’ll keep you posted.

By the way, after the current reporting season these are the top dividend yielders among the ASX 200.

Dogs of Dow strategy

My 13 golden rules of investing

If you decide to give the Dogs of the Dow investing strategy a go, don’t forget my 13 golden rules of investing. The share market is really a great mixture of human emotions, hopes, fears, greed, enthusiasm, stupidity and sometimes, even wisdom. So you can see the benefits of having a set of golden rules of investing as a guide.

1. Do your homework before buying

Don’t buy – or sell – on rumour, hunch or impulse.

Get hold of broker reports and the company’s last annual report. Read the financial press and, of course, talk to your adviser. Buy shares that fit  with an overall investment strategy – for example, for income, growth or both.

2. Balance the risk and reward factors

If what you read and hear suggests that the share has more chance of falling in price than rising, don’t buy.

Look closely at past performance and future prospects. Remember the sleep test. If the worry of your shares falling keeps you awake at night, don’t buy them. Unless you’re a speculator (i.e. gambler), be satisfied with steady progress.

3. Keep checking after you’ve bought

Investment conditions can change, company management can change, the company’s objectives can change.

Review shareholdings at least once every six months in consultation with your broker or adviser.

4. Exercise patience

Don’t expect to become wealthy overnight. Most shares will need at least a year to show some reasonable appreciation. Hang in there.

5. Don’t forget, shares can bring income and capital appreciation

We often ignore the impact of dividends. Estimate both these factors and relate them to your personal tax situation.

6. Be alert to trends

In your daily reading, try to put the news through an investment filter. Political, economic, scientific events may have implications for some companies.

If you get any ideas, check them out further and talk to your broker. Being ahead of the herd can mean nice profits.

7. Be prepared for unexpected events

If the event concerns any of your shares, don’t panic. Review the situation promptly before taking any action.

For instance, a sudden drop in a share price may well mean an institutional investor has sold a large parcel, and the price may rebound within a day or two.

8. Don’t try to back every horse in the race

It is far better to hold a smaller portfolio of shares which you know well and are comfortable with than to invest in a larger number of companies in the hope of picking more winners.

9. Timing can be important

If the share you want is being actively traded, buy at “market price” which is an order to the broker to get the best price possible. With shares that are beginning to attract interest, you can sometimes save money by waiting for a brief price dip.

10. Take a loss quickly

Don’t let pride or stubbornness prevent you from accepting a mistake and correcting it. One big profit makes up for a lot of little losses. So keep them small.

11. Keep an eye on the ex-dividend date

When a company declares a dividend, all shareholders on the books at that date receive the dividend, and usually the price of the shares will drop by approximately the same amount.

Sometimes, the price of the stock will move back up within a day or two. Naturally if you buy on the date it’s announced, you won’t receive the dividend.

12. Follow the market

Don’t try to beat the trend. In bear markets, be cautious; when it’s a fluctuating market, think twice; in bull markets, take greater risks.

13. Take profits

It is better to make a little less profit by selling too soon than to take the greater risk of overstaying the market in a stock which is overpriced.

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