Seeking Alpha
Value, dividend investing, growth at reasonable price, portfolio strategy
Profile| Send Message|
( followers)  

Introduction:

One of the more interesting investment strategies that I've come across is the one known as "The Dogs of the Dow." The reason that I like it so much is that it is a very simple strategy for investors to use.

The way it works is like this. At the end of each year, investors need to rank each of the individual stocks in the Dow by the dividend yield, largest yield to smallest yield.

Once that has been established, the next part of the strategy is for the investor to purchase equal dollar amounts of each of the top 10 dividend paying stocks in the Dow, hold those stocks in a portfolio until December 31st and then sell them and begin the process all over again for the next year.

What I Know:

I've been investing a portion of my funds into the Dogs since the end of 2009. Many of the companies that earn their way into the Dogs each year repeat year-over-year.

What I do is this. I purchase the current year Dogs, but unlike the standard version of the strategy, I don't sell. I just keep on accumulating Dog Portfolios for each year and then begin the process all over again each year.

To give you an idea of how the "repeat" of companies works, here is the listing of the Dogs for each year since I've started doing this:

(click to enlarge)

As you can see, ATT (NYSE:T), Verizon (NYSE:VZ), DuPont (NYSE:DD), Merck (NYSE:MRK), and Pfizer (NYSE:PFE), have been on the Dogs list for the last 4 years. Johnson and Johnson (NYSE:JNJ) and Intel (NASDAQ:INTC) made the list at the end of 2010 and have been on the list for the last 3 years.

At the end of each year, I go out and purchase the next year's 10 stocks as a separate portfolio and leave the previous one intact. As a result of that variance on the Dog's strategy, I might purchase a stock I like more than once, as that particular stock may repeat as a Dog for the next year.

Other people will sell out the entire portfolio at the end of the year and create a new one for the upcoming year. Whatever you chose to do is your decision. You can be a Dog purist or you can tailor the strategy to your own particular bent.

What You Should Know:

Year to date, The Dogs of the Dow have done pretty well as a group. While some companies performed better than others, I tend to look at the entire basket of stocks in the portfolio and judge my results, not on what one company might have done, but what the "basket" of stocks as a portfolio have done.

(click to enlarge)

The 2013 Dogs of the Dow Portfolio is up 20% year-to-date, without dividends being reinvested.

With our initial purchase of $1000 per position, the dollar amounts paid in dividends year to date are not large, on a relative scale, but here's what we've received:

(click to enlarge)

Conclusion:

The Dogs of the Dow Strategy is one that has been around for a long time. There have been years where it has performed better than the Dow and times where it has not. Like any other strategy, it is not for everyone.

A key consideration for the Dogs is that there is a direct relationship between the dividend yield and the price of the stock. (At least as proposed by advocates of the strategy). When the dividend yields for Dow stocks is higher than "normal," there is the argument that this would indicate the stocks in question are undervalued.

We can debate that all day long. However, here's what I have found over the years with this particular exercise. Investing in these companies has worked out very nicely. Home Depot (NYSE:HD) and Boeing (NYSE:BA) are companies that I still own today. Every other company that has come and gone in the Dogs is still part of my portfolio without exception.

For the purpose of this article, I left KFT's current price "blank." The reason is that as you know, KFT split into two companies, Kraft Foods (NASDAQ:KRFT) and Mondelez (MDLZ), both of which I still hold.

Source: Dogs Of The Dow: Back To The Pound For YTD Updates