Dogs of the Index Strategy Beats Buy and Hold in 7 Year Back Test

by: Fredrik Arnold

"It goes against an old wall street rule, not letting your winners run, wonder what the total return was of the stocks that were let loose from the dog pound," wnb1929 commented about my article, "S&P 100 Stocks Traded Like 'Dogs' From 2005 to 2011," on July 19.

As a once per year trading system triggered by yield, the "Dogs of the Index" strategy described in that article has low yielding stocks whose price has increased (or whose dividends have decreased) being sold off once each year to trade up to higher yielding index stocks. So wnb1929's comment about not letting winners run prompted a review of back test results analyzing all 28 trades of the 22 stocks documented in two articles describing seven years of S&P 100 stock trades.

This article compares the results from holding all ten 2004 S&P 100 selections to 2011 to results showing how twelve newcomer replacement stocks leveraged higher returns during the "Dogs of the Index" back test from 2004 to 2011.

Results of buying and holding ten S&P 100 (winners) 2004 to 2011

All ten were bought in 2004 with the dividends accumulating each year until all were sold and the gains calculated in June, 2011. For ease of calculation a $1000 investment per stock was used as an easily divisible stake with a broker commission of $10 factored into each buy and sell.

(Click to enlarge)

The above chart shows how initial investments of $1,000 in each of the ten dogs of the S&P 100 held to 2011 fetched $4,745.76 net return or a 47.46% return over seven years (6.78% per year ) plus $200 to the broker.

* [Note: Extra income earned when Altria spun off its Kraft (KFT) business unit in 2007 and Philip Morris (NYSE:PM) in March 2008 is not included in the return reported. Gains from the base company were calculated by adding the gain from 2004 to 2007 (not shown) to that obtained from 2008 (not shown) to 2011. By this method, Altria led all ten 2004 S&P100 dogs with a net return of 90.12%. See previous Dogs of the Dow meet S&P 100 in a Seven Year Back Test for details.]

Results of the Dogs of the S&P 100 strategy in action 2004 to 2011

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Total net returns for the Dogs of the S&P 100 bought and sold from 2004 to 2011 was 75.78% or 10.83% per year. Replacement and returning stock trading was limited to five slots because five of the original ten S&P100 Dogs listed in Bold on both of the above charts remained in the top ten throughout this back test. They are Altria; AT&T; Southern Co.; Bristol-Myers Squibb; and Verizon.

The "Dogs of the Index" strategy limits the involvement of the investor to focusing on just two key metrics that determine yields to rank and trade the stocks: (1) Stock Price; (2) Annual Dividend. Dividing the annual dividend by the price of the stock reveals the percentage yield by which each stock is ranked. After selecting a pool of forty stocks from the S&P 100 index that threw dividend yields over 1.5% the back test followed, traded and awaited the results from an investment in the lowest priced, highest yielding one quarter of the pool. A third variable of broker commission of $10 per trade was deducted from every transaction to reveal net income in the scenarios above. All the trades took place once a year in June.

Exelon held from 2004 to 2011 returned 52.78%. Purchased in 2004, then traded for Merck in 2005, which was traded for Citigroup in 2007, which in turn was traded for Merck in 2009, then traded back to Exelon in 2010, and sold in 2011, those six S&P 100 stock trades returned 70.37%.

American Electric Power held from 2004 to 2011 returned 38.66%. Purchased for $31.89 in 2004 and sold for $46.27 in 2007 in favor of BAC (when the high price pushed AEPs dividend yield out of the top ten) and fetching dividends of $1.40, $1.40 and $1.46 per share those three years, AEP came back into the top ten in 2009 at $28.37 per share and rose to $37.13 when sold in 2011. Net return for those four trades factoring in the BAC loss was 54.07%.

JPMorganChase held from 2004 to 2011 returned 22.70%. Purchased in 2004 then leveraged by intervening trades for Sara Lee in 2005, Dow Chemical in 2007, Time Warner in 2008, Caterpillar in 2009, Pfizer in 2010 which was sold in 2011, those seven S&P 100 stock trades returned 147.62%.

Texas Instruments held from 2004 to 2011 returned 44.68%. After purchase in 2004 and bolstered by intervening trades for Bank of America in 2005, Ford in 2006, Pfizer in 2007, Dupont in 2009, and Merck in 2011, those six S&P 100 stock trades returned 133.25%.

U.S. Bancorp held from 2004 to 2011 returned 4.43%. After purchase in 2004 USB was supplemented by a trade for Phillip Morris in 2009, then Entergy in 2011, those three S&P 100 stock trades returned 50.86%.


The old wall street rule of letting winners run was not supported in any of the five available S&P 100 2005-11 test opportunities.

The 10 dogs of the S&P 100 bought in 2004 and held to 2011 fetched $4,745.76 net return or a 47.46% return or 6.78% per year.

Total net returns for the Dogs of the S&P 100 bought and sold from 2004 to 2011 was 75.78% or 10.83% per year.

"Dogs of the Index" optimists believe skinny dog stocks (high yielders) will usually outrun fat dog stocks (low yielders). Letting winners run is a good strategy until you get a signal to trade one winner for a bigger winner as is the case when using the "Dogs of the Index" strategy.

Disclosure: I am long T, VZ, MRK.