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Dogs of the Dow Barking Loudly in 2013

22 March 2013 in Trading Ideas

Sometimes it’s easy to see why a classic investing strategy became a classic investor strategy.

Take Dogs of the Dow, for example. It’s one of the simpler ways to pick 10 potential stock winners that require more than randomly drawing them out of a hat, but can still be generated in the time it takes to do a Web search.

For the uninitiated, here’s how it works: at the beginning of every year, take the top one-third of the 30 companies in the Dow Jones Industrial Average, as ranked by dividend yield. Then….that’s it. You invest in those 10 companies. Done.

The general philosophy behind the strategy is that blue-chip stocks with high dividend yields are at the bottom of their business cycles and should improve going forward. In a perfect world, investors would reap the various dividends payout – and see appreciation in share prices.

But the world’s not perfect, is it? As with many valuation metrics (and DogD isn’t exactly rigorous), these things look very good – until they don’t. The classic Dogs of the Dow strategy, which uses equal dollar amounts for all 10 holdings, beat the Dow Jones index by 6.8 percentage points in 2011, but underperformed by 0.2 percentage points in 2012.

This year, however, the Dogs are off to a big year. The 10 dogs from last year are up an average of 15.7% in 2013, outpacing the broader Dow by 5% points. (An investing alternative to the strategy, the Dogs of the Dow motif, is up 13.4% in 2013, and has gained 21.5% in the past 12 months.)

For longer-term investors, the strategy could also prove attractive. From 1957-2003, the Dogs outperformed the Dow by an average of three percentage points.1 Of course, that finding has no influence on what may happen for the rest of this year – and beyond.

1“Stock-picking Strategies: Dogs of the Dow,” Investopedia.com, http://www.investopedia.com/university/stockpicking/stockpicking8.asp,” (accessed March 19, 2013).