A research paper to appear soon in the Journal of Finance shows a better way to apply the Dogs-of-the-Dow approach. It would have returned, say the authors, approximately twice the outperformance recorded by the old Dogs-of-the-Dow approach over the Dow Jones Index between 1983 and 2003.
As you may recall, the Dogs-of-the-Dow approach involves buying every year the ten stocks in the Dow Jones Index with the highest dividend yields. They are the 'dogs' because their share prices have underperformed so much that their dividend yields are consequently high.
But Boudoukh and three other academics write in On the Importance of Measuring Dividend Payout Yield that it would be better to include net share repurchases in the selection process. Specifically, one should buy the Dow stocks with the highest “net payout yields,” which are based on the dollar amounts for dividends plus repurchases less new issues.
The utility of the original Dogs-of-the-Dow approach has waned over the past decade or so partly because of the shift toward returning capital to shareholders via share repurchases, say Boudoukh et al. The net-payout-yield picks up on this shift and conveys more information.
Mebane Faber, who writes the World Beta blog, has compiled a Dogs-of-the-Dow portfolio based on net payout yields. You can see the stocks and track the portfolio on Stockpickr.com.