An easy to implement stock investment strategy is suitably named the Dogs of the Dow.
The basic strategy is implemented by purchasing the ten companies in the Dow (Dow Jones Industrial Average) with the highest yield. You can also just buy the ETF that represents the Dogs of the Dow.
Is buying Dogs of the Dow stocks or the ETF better?
Only you can answer that question based on whether you want to implement this strategy yourself.
Just how hard is it to implement the Dogs of the Dow strategy?
Let’s cover that next so you can see.
Dogs of the Dow Elements
Here is how the Dogs of the Dow strategy works.
Remember, the Dow Jones Industrial Average is made of 30 stocks that have been selected to serve as a benchmark for the economy.
The Dogs of the Dow strategy, as the name implies, assumes that the companies being purchased for the year have fallen from grace with investors. They are, therefore, selling at low valuations.
Remember, when a dividend paying stock drops in value, the yield rises since yield is a function of price and dividend rate. So, this high price is reflected by the high yield, making the Dogs east to find.
A Dogs of the Dow strategy simply buys the highest yielding stocks in the Dow. Most strategies buy 8 to 10 of these highest yielding stocks.
A few later, you sell the stocks that no longer meet the criteria and purchase the new companies that do meet the criteria.
There are many variations on the Dow of the Dow. With the original strategy, though, this rebalancing is only to be done once a year. This can take discipline. The expectation is that during this time at least some of the stocks will probably increase in value.
All the while the generous dividend is being credited to your investment account.
Risk with Dogs of the Dow
It’s important to note that stocks sometimes pay a higher yield during difficult times to make ownership of their stock more appealing. Be aware that these same companies sometimes lower the dividend. If this happens, the stock price usually drops more.
Dogs of the Dow Tips
It’s important to be consistent with the date each year for re balancing the Dogs of the Dow portfolio. For example if you begin on January 2 of each year, use the closest trading date the following year to re-balance.
Be sure to allocate an equal amount of money to each of the ten companies. This means you will own a different amount of shares of each company.
An excellent link for researching the Dogs of the Dow further is dogsofthedow.com. Click on “Dog Years” at the bottom to review annual results.
You’ll notice that performance is inconsistent from year to year therefore this strategy is suited for long term investments over at least several years, like most stock investing strategies.
Again, numerous versions of the Dogs of the Dow exists such as buying a fewer number of stocks. Other strategies factor in the stock’s price relative to the other 30 companies, such as the lowest priced stocks.
You may want to hold the stocks one year and a day to qualify for a long term capital gain on your taxes if you have a profit. You can check with your CPA about this.
This strategy may be suitable for taxable accounts due to the lower tax rate on long term capital gains.
So, is individually buying the Dogs of the Dow stocks or the ETF better? In addition to the ETF, many mutual funds offer this same strategy.
I would personally not pay a fee for this simple strategy. But only you can decide what works best for you should you decide to use the Dogs of the Dow.