The Dogs of The Dow Strategy

In 1884, journalist Charles Dow took out a pencil and paper to literally draft back-of-the-envelope calculations for a new stock market average. Over time, The Dow Jones Industrial Average would emerge as the most iconic benchmark of the U.S. stock market. Traders, of course, have designed numerous strategies to profit off apparent patterns within the Dow Jones Industrial Average (DJIA). The Dogs of the Dow strategy prioritizes component stocks according dividend yield, before assembling and rebalancing a portfolio.  Be advised that program trading introduces distinct risks to any investment plan.

Dow 30 Components

The Wall Street Journal editorial board is tasked with compiling and sorting out the 30 different component stocks that make up the Dow Jones Industrial Average. The 30 different stocks will be outlined within the investing section of this newspaper, and at various online resources. These businesses have been selected to represent the overall U.S. economy. As of September 20, 2013, the Dow Jones Industrial Average included ExxonMobil, General Electric, Coca Cola, Nike, and Goldman Sachs.

Dividend Yields

Again, the Dogs of the Dow strategy calls for its practitioners to first organize the 30 component stocks according to current dividend yield. Dividend yield information can be found within the Wall Street Journal and online. The Dow 30 stocks may be categorized according to dividend yield in descending order by hand or with the help of Microsoft Excel spreadsheets and various stock screening programs. Proponents of the Dogs of the Dow strategy may consider the highest dividend yield stocks to be cheap. Dividend yield calculations divide estimated annual dividends by current share prices. As such, dividend yield percentages generally increase amid share price declines.

Rebalancing Dogs of The Dow Portfolio

Dogs of the Dow investors may buy and own the ten component stocks with the highest dividend yields in equal amounts to build your portfolio. These ten stocks are the Dogs of the Dow, and the high dividend yields are the result of these investments losing near term value. Again, supporters of this strategy may reason that these Dogs are undervalued, and more likely to outperform the overall market, over the next year. Aggressive Dogs of the Dow trader may limit his portfolio to either five stocks, or invest higher percentages of capital into the highest dividend payers.

The Dogs of The Dow portfolio may be rebalanced annually. At that point, the old stocks may be traded for the latest Dogs of the Dow. Ongoing Dogs of the Dow portfolio investment returns should be benchmarked against DJIA and Standard and Poors 500 Index returns, in order to determine whether this strategy actually provides value.

Financial Risks

Mechanical investment strategies that ignore economic fundamentals are always open to controversy. Dividend yields, alone, are not true indicators of value. Real fundamental analyses would take revenue, net income, assets, and debt calculations into consideration, before trading stocks.

Be advised that dividend payments to common stock investors are never guaranteed. Struggling businesses with relatively high payouts may opt to cut, or even eliminate dividends altogether, at any time. Some stocks are cheap for a reason, when the business may be deteriorating towards bankruptcy.

Lastly, the annual rebalancing that is required to manage the Dogs of the Dow portfolio also exposes the investments to capital gains taxes and trading commissions that may lower total returns.