There are hundreds, if not thousands, of investment strategies in existence which proclaim to be the best for maximising returns. From broad policies such as value or growth investing, to more quirky approaches such as astronomical cyclical analysis, investors are spoilt for choice when it comes to selecting a set of rules or procedures on which to base their stock-picking strategies.
One of the most well-known strategies, popularised by fund manager Michael B. O’Higgins in his 1991 book, Beating the Dow, is the Dogs of the Dow. This simple and easily implemented investment method sees investors put equal amounts of money into ten individual companies, otherwise known as “dogs”, which are constituents of the blue-chip focussed Dow Jones Industrial Average index. The term “dogs” in this context specifically refers to the companies with the highest historic dividend yields.
The thinking behind this strategy is based on the notion that dividends paid by blue-chip firms are relatively stable throughout the business cycle. So companies which exhibit high dividend yields are likely to be out of favour in the market, perhaps due to a downturn in the wider sector in which they operate, and thus have low share prices. However, due to their inclusion in the Dow index the companies, by definition, should still be quality, well run businesses, able to quickly recover from tough trading conditions.
Dogs of the Dow focussed investors are hoping that the market will eventually recognise this quality so that over time the ten shares will recover, rising in value to generate a return above that of the wider index. The portfolio is periodically rebalanced, typically annually, with the previous year’s dogs replaced with a new but again equally weighted selection based on the same criteria….
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