Dogs of the Dow

Dogs of the Dow: 

Dogs of the Dow Investment Strategies

Investment Strategies: 

Investment Strategies There are a host of different strategies used by investors to try to ‘beat the market’ Most try to find undervalued/overlooked investments or try to find investments that have momentum in some direction (ie. steadily increasing prices and investor interest). Examples include: Dow Theory Dollar cost averaging, and Dogs of the Dow ….although there are many, many others.

Dollar Cost Averaging: 

Dollar Cost Averaging DCA is more a savings strategy than an investing strategy…because investors of limited means, set aside a regular amount of money each pay period. DCA has been proven to be a good savings strategy but a poor investment strategy. As an investment strategy it is predicated on the assumption that the value of the investment will decline sometime over the investment period…in other words, it is an investment strategy with bearish intent. I have a separate slide set on DCA averaging that you may wish to see.

Dogs of the Dow: 

Dogs of the Dow Invented by stockbroker Michael O’Higgins. Premise: Blue-chip stocks are too big to fail. How It Works: If you can buy poor performing stocks that are temporarily cheap, you can benefit from their health cash dividends and maybe even cash in on some capital gains as their share price recovers. Blue-chip members of the key stock market indicator series such as the Dow Jones Industrial Average or the S&P TSX 60, are the target of this investment strategy. They are closely followed by analysts and institutional money managers…when they are in favour, they attract a lot of attention and share price appreciation can be very strong…when they fall out of favour, they can become very ‘cheap.’

Dogs of the Dow …Using the Strategy in the U.S.: 

Dogs of the Dow … Using the Strategy in the U.S. Invented by stockbroker Michael O’Higgins. Premise: Blue-chip stocks are too big to fail. How Do You Do This? Pick the 10 stocks in the Dow Jones Industrial Average with the highest dividend yields. In most cases, these stocks are paying high yields because they’re perceived as slow-growing or troubled firms – dogs! You hold them a year, collect their cash dividends, then replace them with a new pack of dogs. In a good year, many of these large U.S. stocks not only wind up paying you a nice yield, but go up in price as growth picks up or problems fade (or are managed) away.

Dogs of the Dow …Using the Strategy in Canada: 

Dogs of the Dow … Using the Strategy in Canada Invented by stockbroker Michael O’Higgins. Premise: Blue-chip stocks are too big to fail. How Do You Do This? Pick the 10 stocks in the S&P/TSX 60 index with the highest dividend yields Give them a year to hunt before returning them to the pound.

Dogs of the Dow …Historical Performance of the Strategy: 

Dogs of the Dow … Historical Performance of the Strategy U.S. Historical Experience From 1973 through 2005 the Dogs of the Dow produced average annual gains of 14.6% or 3.4% better than the Dow Jones Industrial Average over the same time period. In 2005 Dogs of the Dow didn’t live up to expectations, losing 5.1% when the Dow returned 1.7%. The Canadian Experience David Stanley, University of Guelph professor emeritus, tracks Canadian dogs and rebalances his portfolio each year on May 25. According to Stanley, dogs of the TSX have gained an average of 13.5% each year since 1987, exceeding the return on the market index by 3.6% a year. In 2005, Canadian dogs gained 22.9% which is just slightly better than the TSX 60 that also returned over 21%.

Dogs of the Dow …Dogs of the DJIA 2006: 

Dogs of the Dow … Dogs of the DJIA 2006

Dogs of the Dow …Dogs of the S&P/TSX 60 - 2006: 

Dogs of the Dow … Dogs of the S&P/TSX 60 - 2006

Words of Caution: 

Words of Caution It is important to remember to always do your due diligence when selecting investments. Sometimes, a stock is a ‘dog’ for good reasons and it may be on a free-fall to reorganization, or worse, bankruptcy. For example, in the U.S. GM in 2005 was the only company in the DJIA to lose money for investors ($6.91 per share). GM has so much debt that Standard & Poor’s have cut its debt rating to a single B….well into junk bond territory. GM’s health care costs and pension obligations are rising relentlessly and the firm is facing tough competition in the auto industry, lower demand and out of date styling and engineering of its products. When you look at the extremely high dividend yield for GM, you can see how much the price must have fallen vis a vis the stock price…so clearly, the market is very pessimistic about the future of this firm. Risks also exist in the Canadian list…Canadian Bank stocks have enjoyed very good price performance in 2005…there may not be further room for improvement this year. (2006)

Summary: 

Summary Many investment strategies are designed to find under-valued securities that have the potential for high risk-adjusted returns once the market discovers that it has overlooked value. Never naively implement an investment strategy…always perform your own due diligence and understand the risks that you are likely to undertake.

On Line Resources: 

On Line Resources Dogs of the Dow dot com Winning Investing dot com Fool dot com – “The Foolish Four” Forbes article on Dogs of the Dow About Money dot com MSN Money article on why Dogs of the Dow no longer works Globe Investor article on Dogs of the TSX Money Sense article “These Dogs Can Bite”

Investing in the Market Index: 

Investing in the Market Index EFTs – Exchange Traded Funds are one way you can invest in the market rather than through indexed mutual funds