The Dogs of the Dow is a stock selecting strategy popularized by Michael B. O’Higgins in 1991. It is dedicated to choosing the highest possible dividend paying Dow stocks.
The methodology is very simple:
Under this model, an investor annually reinvesting in high-yield companies should out-perform the overall market. The logic behind this is that a high-dividend yield suggests both that the stock is oversold and that management believes in its company’s prospects and is willing to back that up by paying out a relatively high dividend. Investors are thereby hoping to benefit from both above-average stock-price gains as well as a relatively high quarterly dividend.
The first assumption is that the dividend price reflects the company size rather than the company business model. The second is that companies have a natural, repeating cycle in which good performances are predicted by bad ones. Due to the nature of the concept, the Dogs may come from a small number of sectors. For example, the ten stocks that belonged to the 2015 Dogs of the Dow list came from only six sectors, including industrials, energy, and healthcare, in contrast to the S&P 500 Index which covers eleven sectors.
Benefits of the Strategy
The method includes limited effort and time of setting up top 10 dividend yielding stocks just once in a year. The period invested tend to be just a couple of hours. It has a pretty good track record over the years.
There is absolutely no trading strategy that can guarantee results or provide a fool-proof stock picking strategy. The Dogs of the Dow is a simple and beneficial trading strategy based on the results of the last 50 years. Choose the 10 highest yielding stocks of the 30 Dow stocks, and after that balance your portfolio equally among them, tweaking the portfolio on an annual basis, and you can expect about a 2-3% outperformance of the Dow.
The profitability of this strategy has plenty to do with the idea that substantially, the highest dividend-yielding stocks also happen to be the most affordable, as stated by James Meyer, chief investment officer at Tower Bridge Advisors.
Like any other strategy, there can be pros and cons to the DOD strategy. It can be difficult to follow a formula through drawdown periods. If your first year is a loss, you probably won’t stay with the program.
What if you want to apply this same strategy on Nifty? In this blog post, we will see how the strategy can be used to identify the Dogs of the Nifty using Investar.
Step 1: Identify and choose the top 10 stocks in an Index (e.g., Nifty) based on dividend yield, where Dividend Yield = Annual dividend per share/ Current Stock Price. For example, if a company’s annual dividend is Rs. 2 and the stock trades at Rs. 40, the Dividend Yield is 5%. (Rs. 2 / Rs. 40 = 0.05)
For more details, read Investing in High Dividend Yield Stocks.
In order to apply the Dogs of the Nifty strategy in Investar, we need to add a Nifty Index group first (only if not there in Favorite Pane). To do this:
- Right click on “Name” column and
- Select “Create Favorite Index Group”
Once you have selected Create Favorite Index Group, a new window will be opened like this:
1: Select the Exchange NSE
2: Choose NIFTY from “Index list”
3: Click OK after you are done.
Once you are done, simply click Scans & Favorite tab to view the list of the Top 10 stocks in an Index, by clicking on Div Yield % to set it in ascending/descending order.
Step 2: Designate your investments evenly among these 10 stocks and keep the stocks for just one year. E.g. if you were to start off this strategy now on a Rs 1,00,000 investment, then you need to put Rs 10,000 in each of the stocks shaded in the figure above (as of the last market day of the year).
Step 3: Every year on the last market day, you rotate the investments so that you are invested equally amongst the 10 “top dogs” as mentioned in steps 1 and 2.
So if you are investing in mutual funds or index funds, you should at least give the “Dogs of the Nifty” a try and you might be surprised to see it outperform the Nifty if you are patient enough to wait for the long term.