The Dogs of the Dow
Encyclopedia
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.
Proponents of the Dogs of the Dow strategy argue that 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. 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.
The Dogs of the Dow were created by data mining
. If you look at Dow stocks on January 1 then the high yielding stocks did significantly better than average before 1991 than they did after 1991. The Motley Fool
created the Foolish Four
which used the square root of the price and dividend in order to create back tested results better than the Dogs of the Dow. All of these methods were dependent on the fact that the stocks picked on January 1 performed better than stocks picked at other times during the period of back testing.
Investment
Investment has different meanings in finance and economics. Finance investment is putting money into something with the expectation of gain, that upon thorough analysis, has a high degree of security for the principal amount, as well as security of return, within an expected period of time...
strategy popularized by Michael B. O'Higgins, in 1991 which proposes that an investor annually select for investment the ten Dow Jones Industrial Average
Dow Jones Industrial Average
The Dow Jones Industrial Average , also called the Industrial Average, the Dow Jones, the Dow 30, or simply the Dow, is a stock market index, and one of several indices created by Wall Street Journal editor and Dow Jones & Company co-founder Charles Dow...
stocks whose dividend
Dividend
Dividends are payments made by a corporation to its shareholder members. It is the portion of corporate profits paid out to stockholders. When a corporation earns a profit or surplus, that money can be put to two uses: it can either be re-invested in the business , or it can be distributed to...
is the highest fraction of their price.
Proponents of the Dogs of the Dow strategy argue that 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
Business cycle
The term business cycle refers to economy-wide fluctuations in production or economic activity over several months or years...
. 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. 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.
The Dogs of the Dow were created by data mining
Data mining
Data mining , a relatively young and interdisciplinary field of computer science is the process of discovering new patterns from large data sets involving methods at the intersection of artificial intelligence, machine learning, statistics and database systems...
. If you look at Dow stocks on January 1 then the high yielding stocks did significantly better than average before 1991 than they did after 1991. The Motley Fool
Motley Fool
The Motley Fool is a multimedia financial-services company that provides financial solutions for investors through various stock, investing, and personal finance products. The Alexandria, Virginia-based private company was founded in July 1993 by co-chairmen and brothers David and Tom Gardner, and...
created the Foolish Four
Foolish Four
The "Foolish Four" is a discredited mechanical investing technique that, like the Dogs of the Dow, attempts to select the member stocks of the Dow Jones Industrial Average that will outperform the average in the near future....
which used the square root of the price and dividend in order to create back tested results better than the Dogs of the Dow. All of these methods were dependent on the fact that the stocks picked on January 1 performed better than stocks picked at other times during the period of back testing.
External links
- Dogs of the Dow has been tracking this investment strategy since 1995.
- Current Dogs of the Dow
- Latest performance of the Dogs of the Dow
- Dividend Window Current yield tables for UK and US markets.
- Dogs of the Dow and the 'Foolish Four'