"Dogs of the Dow" Investment Method

After taking five vacations this summer, I come back to a crazy work month as we have a major sporting event in my city. Roads are blocked everywhere – getting to and from work have been a challenge, and more traffic to come. I’m getting “forced” overtime pay as I have to leave for work 2 hours ahead instead of 30 minutes because I don’t know what kind of traffic I would run into.

Soccer season has begin again. I have been a busy bee trying to switch my schedule around at work to free the afternoon off. It is the U12 team, but since they didn’t have enough U10 kids, they have move some of the U10 kids to my team. At the first practice, I made them do sprint, we did 2 sprinting laps. Running is boring, so to make it interesting, I normally would run with them and make a competition out of it. One of the little boy was saying “I’ve never gotten beaten by a girl before (he refers me as a “girl” ha). Anyhow, I told him, I’m not just a girl, I’m your coach of course I’d beat you on every skills include sprinting :). (I didn’t tell him I was the fastest girl at my middle school, and that, I don’t normally run, so my muscle naturally have a lot of fast twist for fight-or-flight event.)

I’ve also learnt from Wikipedia the investment method call “Dogs of The Dow”.

The Dogs of the Dow is an investment strategy popularized by Michael B. O’Higgins, in 1991 which proposes that an investor annually select for investment the ten Dow Jones Industrial Average stocks whose dividend is the highest fraction of their price.

Method: 

Blue Chip companies do not alter their dividend to reflect trading conditions and, therefore, the dividend is a measure of the average worth of the company; the stock price, in contrast, fluctuates through the business cycle.

• This should mean that companies with a high yield, with high dividend relative to price, are near the bottom of their business cycle and are likely to see their stock price increase faster than low yield companies.
• 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.

Of course, several assumptions are made in this argument.

1. The dividend price reflects the company size rather than the company business model.
2. Companies have a natural, repeating cycle in which good performances are predicted by bad ones.

Results:

O’Higgins and others back-tested the strategy as far back as the 1920s and found that investing in the Dogs consistently outperformed the market as a whole. Since that time, the data shows that the Dogs of the Dow as well as the popular variant, the Small Dogs of the Dow, have performed well. For example, for the 20 years from 1992 to 2011, the Dogs of the Dow matched the average annual total return of the Dow (10.8%) and outperformed the S&P 500 (9.6%)

The Small Dogs of the Dow, which are the five lowest priced Dogs of the Dow, outperformed both the Dow and S&P 500 with an average annual total return of 12.6%.

1.  When each individual year is reviewed it is clear that both the Dogs of the Dow and Small Dogs of the Dow did not outperform each and every year.
2. In fact, the Dogs of the Dow and Small Dogs of the Dow struggled to keep up with the Dow during latter stages of the dot-com boom (1998 and 1999) as well as during the financial crisis (2007-2009). 
3. This suggests that an investor would be best served by viewing this as a longer-term strategy by giving this portfolio of stocks time to recover in case of a rare but extreme economic event (e.g., dot-com boom, financial crisis).
4. While most any investor can back test an investment system that performed well over the recent past (data mining), what is unique about the Dogs of the Dow in this regard is that it has been forward tested for over two decades which included multiple booms and busts.

How to Apply this method? What are the dogs of the dow stocks today?

Symbol	Company	Price	Yield	Price	Yield	Day % Chg
NYSE / NASDAQ	The 2018 Dogs of the Dow are listed in blue	on 9/17/15	on 9/17/15	on 9/18/15	on 9/18/15	See Note 1
T	AT&T	32.78	5.74%	32.55	5.78%	-0.70%
CVX	Chevron	79.41	5.39%	77.74	5.51%	-2.10%
VZ	Verizon	45.23	5.00%	44.57	5.07%	-1.50%
CAT	Caterpillar	74.06	4.16%	71.86	4.29%	-3.00%
XOM	ExxonMobil	74.46	3.92%	72.68	4.02%	-2.40%
PG	Procter & Gamble	70.24	3.77%	69.94	3.79%	-0.40%
GE	General Electric	25.35	3.63%	24.8	3.71%	-2.20%
IBM	International Business Machines	148.14	3.51%	144.51	3.60%	-2.50%
MCD	McDonald’s	97.84	3.48%	97.05	3.50%	-0.80%
KO	Coca-Cola	39.38	3.35%	38.98	3.39%	-1.00%
PFE	Pfizer	33.48	3.35%	32.85	3.41%	-1.90%
MRK	Merck	53.96	3.34%	52.13	3.45%	-3.40%
CSCO	Cisco Systems	25.88	3.25%	25.54	3.29%	-1.30%
INTC	Intel	29.71	3.23%	29.02	3.31%	-2.30%
JNJ	Johnson & Johnson	94.84	3.16%	93.39	3.21%	-1.50%
DD	DuPont	48.08	3.16%	47.53	3.20%	-1.10%
WMT	Wal-Mart	64.47	3.04%	63.34	3.09%	-1.80%
MMM	3M	142.95	2.87%	139.62	2.94%	-2.30%
JPM	JP Morgan Chase	62.65	2.81%	60.94	2.89%	-2.70%
MSFT	Microsoft	44.25	2.80%	43.48	2.85%	-1.70%
UTX	United Technologies	93.31	2.74%	91.07	2.81%	-2.40%
BA	Boeing	137.45	2.65%	136.09	2.67%	-1.00%
TRV	The Travelers Companies	101.66	2.40%	99.66	2.45%	-2.00%
HD	Home Depot	117.91	2.00%	115.12	2.05%	-2.40%
UNH	Unitedhealth Group	123.26	1.62%	122.47	1.63%	-0.60%
AXP	American Express	77.06	1.51%	75.95	1.53%	-1.40%
GS	Goldman Sachs	186.45	1.39%	180.94	1.44%	-3.00%
DIS	Disney	104.2	1.27%	102.84	1.28%	-1.30%
NKE	Nike	115.27	0.97%	115.05	0.97%	-0.20%
V	Visa	70.96	0.17%	69.79	0.17%	-1.60%
Index	Description	Price	Avg Yield	Price	Avg Yield	Day % Chg
–	–	on 9/17/15	on 9/17/15	on 9/18/15	on 9/18/15	See Note 1
AAPL	Apple	113.92	1.83%	113.45	1.83%	-0.40%
Index	Description	Price	Avg Yield	Price	Avg Yield	Day % Chg
–	–	on 9/17/15	on 9/17/15	on 9/18/15	on 9/18/15	See Note 1
Dogs of the Dow	10 highest yielding Dow stocks on 12/31/14	–	4.13%	–	4.21%	-1.90%
Small Dogs of the Dow	5 lowest priced Dogs on 12/31/14	–	4.21%	–	4.27%	-1.40%
Dow 30	30 Dow stocks on 12/31/14	–	2.99%	–	3.04%	-1.80%
DJIA	Dow Jones Industrial Index	16,674.74	2.99%	16,384.79	2.91%	-1.70%

1. I didn’t know about this method but I have bought some of the stocks in the past, so I was just continue to average down such as WMT, CAT, PG, 
2. T is no longer a member of the DOW, but I might consider buying more if it go down some more
3. Millennials who has just started to invest in 2008, haven’t seen the increase rate environment and hasn’t seen the bear market yet. So, it will be very interesting how millennials on Wall Street will react.
4. The question is dividend stocks the answer? It could be if we are entering the bear market.

Please let me know what you think about this investment strategy. Have you tried it before? Are you doing your own version of the “dog of the DOW”. Let me know what are you thoughts.