The Dogs of the Dow is an investment strategy popularized by Michael O'Higgins in his 1991 book, Beating the Dow. The concept is simply to buy the 10 stocks in the Dow Jones Industrials Average (DJIA) that have the highest dividend yields in January. Then you stick with those stocks through the rest of the year.
It's really a "buy low" strategy, based on the notion that the stocks with the highest yields got that way because of falling prices—a stock's dividend yield is calculated by dividing the per share dividend by the price per share, and when the price drops, that increases the yield. The notion is that last year's investment "dogs" may be set to rise in the coming year.
There are a number of variations on the theme. For instance, Small Dogs of the Dow involves buying five DJIA stocks instead of 10.
O'Higgins searched back decades to prove his theory, and although it hasn't always worked, overall this strategy has helped investors more than it hurt. And in 2016, Dogs of the Dow provided a return of close to 18%, compared with 14% for the DJIA overall.
Still, Dogs of the Dow ignores other crucial information, including investment fundamentals and your personal risk tolerance, and most experts recommend against relying solely on this or other investing shortcuts. It's far better to develop a comprehensive plan with your financial advisor that accounts for all relevant factors. Blindly following Dogs of the Dow could be barking up the wrong tree.
This article was written by a professional financial journalist for McCarthy Asset Management, Inc and is not intended as legal or investment advice.