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The stocks featured in the January 2006 edition of SINLetter were loosely based on the Dogs of the Dow theory, a theory made popular by Michael O’Higgins in his 1991 book Beating The Dow. As investment ideas and theories gain popularity, their effectiveness often decreases. The same was true for the Dogs of the Dow theory and many variations were devised to try to improve upon the results of this basic theory.

Dogs of The Dow

The original dogs of the dow theory is appealing for various reasons:

  • Simplicity. The Dogs of the Dow theory is very simple to follow as you buy the 10 highest dividend yielding stocks from the Dow Jones Industrial Average [DJIA] and hold them for a year.
  • The built-in tax advantage. Since you hold these stocks for a year, it translates into lower capital gains tax (currently no more than 15%).
  • High dividend yields. By the very definition of the theory you are picking stocks that pay nice dividends and hence continue to reward you through the year even if the price of the stock does not appreciate much.
  • So how have the Dogs of the Dow held up in 2006? While the "Bulls" and the "Bears" are trying to find their footing on Wall Street this year, the "Dogs" have been barking up the right tree as the following tables illustrate,

    2006 Dogs of the Dow**

    Dog Symbol Price Then
    (12/30/2005)
    Price Mid-Year
    (6/30/2006)
    Price Now
    (8/9/2006)
    Change*
    General Motors GM $19.42 $29.79 $30.78 58.50%
    AT&T T $24.49 $27.56 $30.24 23.48%
    Verizon VZ $30.12 $33.08 $33.83 12.32%
    Merck MRK $31.81 $36.43 $41.46 30.34%
    Altria MO $74.72 $73.43 $80.16 7.28%
    Pfizer PFE $23.32 $23.47 $26.15 10.82%
    Citigroup C $48.53 $47.76 $47.83 -1.44%
    DuPont DD $42.50 $41.60 $39.20 -7.76%
    JP Morgan Chase JPM $39.69 $41.66 $44.35 11.74%
    General Electric GE $35.05 $32.96 $32.28 -7.9%
    Total Returns Excluding Dividends 13.74%

    ** Ordered by dividend yield on December 30, 2005

    * Does not include dividends

    These returns are very impressive and represent an annualized return of 23.65%. How does this compared with the returns from the major indices this year?

    2006 Dogs of the Dow 13.74%
    Dow Jones Industrial Average 3.35%
    S&P 500 1.41%
    Nasdaq -6.58%
    Russell 2000 1.15%

    Source: So Far, the Dow Dog are Stars