I recently wrote an article, "Dogs of the Dow: A Look At The Results For 2012." Today, I would like to take a look at the Dogs of the Dow for 2013. But, before we get too far ahead of ourselves, I'd like to share some background behind the Dogs strategy, so that you might have a little clearer idea of what the strategy is, how it came about, and how it is supposed to work.
What You Need To Know:
The Dogs of the Dow is an investment strategy made popular by Michael O'Higgins, in his book, "Beating the Dow." One of the more attractive features of this strategy is its simplicity. Investors simply need to rank the 30 companies that make up the Dow Jones Industrial Average by dividend yield-highest to lowest. Then select the 10 companies that have the highest yield and purchase equal dollar amounts of each company.
Once you have created your Dogs of the Dow portfolio, you need to just "set it and forget it." You will hold the 10 companies for 12 months-the usual drop dead date being December 31st. There will be no additions to the portfolio and no subtractions. Just leave it as it is in the beginning and at the end of 12 months, sell your positions and create the new Dog list for the coming year.
The underlying theory behind this strategy is this: These high yielding companies that make up Dogs of the Dow have fallen out of favor with investors and their yield is a reflection of the stock price being beaten down. The theory would have these stocks recover and prices revert back to mean, thus providing the investor with a value driven strategy that also happens to throw in dividends for good measure.
While O'Higgins makes the case that the Dogs of the Dow have outperformed the Dow, going back to the 1920's, investors should realize that this strategy, like any other strategy, is not a sure thing.
In recent years, the Dogs of the Dow have not always beaten the market and there is no guarantee that it will beat the market in any given year moving forward. However, when you look at the strategy, it is one that forward tests every time it is initiated. I find that to be interesting, don't you?
What I Know:
Here is a list of the companies that make up the Dogs of the Dow for 2013. The prices listed for each stock is as of December 31, 2012. If you would like to participate in the Dogs of the Dow, there is no reason that you could not initiate a portfolio this week or next. Just remember that you need to purchase in equal amounts and then "set it and forget it."
Based on the current dividends, this chart shows you the expected income to be received from your portfolio of Dogs, based on a purchase of $1000 per position. Since timing is not relevant, waiting for a specific price point is not necessary. It is what it is.
As shown here, based on these numbers, the portfolio will throw off a little over 4% in income in 2013. Where will these companies be priced at the end of 2013? I don't know. But, in my own regular retirement portfolio, I already own all of these stocks with the exception of Hewlett-Packard (HPQ). Most of my positions were bought as part of my participation in the Dogs strategy.
Summary and Conclusion:
The Dogs of the Dow is a simple strategy and in my opinion worth playing, if you have the money to invest. I do not believe that this should be your core investment strategy by any stretch of the imagination. It is just a side-deal that you may or may not decide to participate in.
Looking at it from the outside, I can appreciate all of the arguments for and against a particular company in the list of those that make up the Dogs.
As a DG investor, the Dogs do not always meet my metric for my retirement portfolio. I want companies that:
1. Pay a dividend and have done so a minimum of 5 years
2. Have increased those dividends annually for a like period
3. Have increased those dividends at a rate greater than inflation
4. Are priced at a value, relative to intrinsic worth
But, by the same token, that DGI criteria does not prevent me from taking a position in an alternative investing strategy. I would not rule out an obvious growth opportunity. I would not rule out purchasing a stock that pays a small dividend or no dividend at all, if the stock were a screaming value. As for this year, what the heck. I'll play the Dogs of the Dow one more time.