Add a little bite to your portfolio
Want better returns in 2010? Get a dog.
Buying a dog to improve your portfolio? It’s not as crazy as you think. At least not if you subscribe to the “Dogs of the Dow” theory put forward in 1991 by economist Michael Higgins.
Some dogs!
Obviously, we’re not talking about flesh-and-blood canines. These are the “dogs” of the Dow Jones Industrial Index, that is, the stocks that have performed worst over the course of the year. On the last day of the year, you look at the 30 stocks that make up the Dow Jones and select the 10 that offered the highest dividend yield, which usually indicates that their value has dropped considerably. Then you purchase an equal amount of all 10 stocks. In other words, you’re investing in the 10 “Dogs of the Dow.”
Then what?
Because Dow Jones listed stocks are big industrials, the 10 troubled companies are not likely to go bankrupt. In fact, according to the theory, the opposite will happen: their value will increase significantly over the next 12 months. And guess what? At the end of the year, you’ll sell the stocks – now worth more – and buy the 10 new Dogs.
Does it work? See for yourself. Since 1973, the Dogs of the Dow have averaged an annual return of 17.7%, compared to 11.9% for the overall index. And the Small Dogs – the bottom five of the pack – did even better, generating a 20.9% average annual return. In 2006, the dogs actually averaged 30.3%, compared to 19.1% for the index.1
| Good dogs | |
| The 10 Dogs of the Dow for 20101 | |
| These are the stocks offering the highest dividend yield at December 31, 2009. | |
| AT&T | Chevron |
| Verizon | McDonald's |
| DuPont | Pfizer |
| Kraft | Home Depot |
| Merck | Boeing |
Buyer beware
Of course, you can’t just apply the theory blindly. For example, at the end of 1999, Philip Morris shares were in the doghouse, but went on to lose another 24% of their value in the following months. The same year, Laidlaw, which was one of the TSX Dogs, slid into bankruptcy. In some cases, dividends end up being slashed due to tough times within the company, depriving investors of appreciable returns. In fact, in the last two years, the Dogs averaged lower returns than those of the overall index.1
The moral of the story is that there is no magic recipe for making a killing on the stock market. Still, there is some validity to the Dogs of the Dow theory – in particular the principle of buying low when the stock value drops.
1 Source: www.dogsofthedow.com
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