Dogs of The Dow Investing Strategy
This strategy was popularized by the prestigious American magazine Barron’s. According to This strategy managed to exceed the profitability of the Dow Jones by a wide margin.
The strategy is to buy the top 10 Dow Jones dividend yields at the beginning of the year. At the beginning of each year, the portfolio is restructured so that it is comprised of the 10 most profitable securities per dividend at that time. Some securities will remain among the 10 with the highest dividend yield and therefore will remain in the portfolio, while the others will be sold to buy their substitutes.
The strategy is automatic since you don’t have to make any decisions. Simply restructure the portfolio at the beginning of each year.
Courtesy of Yahoo Finance: 2017’s Dogs of the Dow
In the original strategy, portfolio restructuring is done on the first business day of the year, but the day of the year is really indifferent, while the portfolio is restructured exactly every 12 months.
This strategy is a way of automating the contrary opinion – that is, try to “buy what others sell” and “sell what others buy” in a mechanical way so that it can be done by any investor.
The strategy is valid but a possible risk that I see is that at some point you buy a company in clear decline but with a very high dividend yield in the previous year. This can happen when a company’s business deteriorates very quickly, so the data of the recent past are good but the data of the near future can be quite worse.
Cyclical companies (steelmakers, airlines, etc.) can also be bought up the middle of the cycle, when their profits and dividends are very high, just before the cycle changes and those profits and dividends fall.
The only way to avoid this would be for the investor to analyze each company before buying it. In case any present symptoms of having permanent problems in the future, don’t include it in the portfolio, and instead buy the next one from the list (the number 11 in dividend yield).
One disadvantage of this correction of the original strategy is that, in principle, the 10 companies that are included each year in the portfolio will have some type of problem or uncertainty because if they did not have the most probable that their profitability by Dividend was not among the highest. That is to say, the strategy seeks to buy companies on which there is some uncertainty to sell them when this uncertainty has passed and its price has performed better than the market. Therefore, the investor must be able to distinguish between a temporary uncertainty and a serious and permanent deterioration in the business of the company.
If you don’t filter the strategy, you run the risk of buying a company with serious problems. And if you apply the filter too aggressively, you may have the problem of discarding too many companies to reduce the risk, and end up not buying the 10 most profitable companies (per dividend yield). Instead, you end up with 10 companies towards the middle of the table, so the strategy would have little to do with the original one, and would look more like a discretionary selection of values than the “Dogs of the Dow.” Needless to say, do your homework before committing to this strategy.