Using the Dogs of the Dow Investing Strategy

Not all dogs are alike, but this one can run.

Arf! Arf! Show me the (dog) money.

It is hard to remember in times like these, when the stock market is in raging bull mode, that there are other types of investing strategies besides "passive" ones.  We are so conditioned now to just put our money in stocks and assume that the market will take care of the rest.

But since the 1990's there has been a successful strategy called "The Dogs of the Dow," which although not technically "active" investing, is definitely not passive.

The "dogs" involves looking at all 30 stocks that make up the Dow Jones Industrial Index to see which have the highest dividend yield.  High dividend stocks, according to Dow Theory, may be underpriced and poised to appreciate.

Next you take the money you wish to invest and spread it equally among those 10 stocks.  Then you do nothing.  Well, nothing for a year at least.

After a year, you look at your 10 stocks to see if they are still among the highest in dividend yield.  If they are, you hang onto them for another year.  If they aren't, you sell them and replace them with the top 10 yielding stock you don't already own.

Here is a little bit deeper dive on the premise from Investopedia.

The premise of this investment style is that the Dow laggards, which are temporarily out-of-favor stocks, are still good companies because they are still included in the DJIA; therefore, holding on to them is a smart idea, in theory. Once these companies rebound and the market has revalued them properly (or so you hope), you can sell them and replenish your portfolio with other good companies that are temporarily out of favor. Companies in the Dow have historically been very stable companies that can weather any market decline with their solid balance sheets and strong fundamentals. Furthermore, because there is a committee perpetually tinkering with the DJIA's components, you can rest assured that the DJIA is made up of good, solid companies. 



Though this strategy does not seem very exciting, that is exactly the point.  It is designed to be a mechanical, if slightly active, way of managing your money, and aims to remove any emotion from the decision making process.

Historically the Dogs of the Dow has beaten the S&P 500 the majority of the time, though there have been certain time periods where it was even or under-performed slightly.

 One of the key points in this strategy is to make sure that you hold your position for one year and a day so that they qualify for long-term capital gains rates on your taxes.

When the "dogs" strategy was first devised, it was much harder than it is today to move money in and out of a position than it is today.  Because of this, the "dogs" - this is the last time I will say that - strategy does not have to be used in an "all or nothing" manner, and can actually be just a component of an overall diversified portfolio.

You can also create your own variant on the strategy. For example, if you don't have enough capital to put into 10 Dow stocks, you could always limit it to the top 5 dividend yielding stocks.  Although I guess in that case, it would be called the "Puppies of the Dow" theory.  *Editor's note* There is no way I just said that.

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