What are the "Dogs of the Dow"?

By Investopedia Staff AAA
A:

The Dow Jones Industrial Average (DJIA) is an index of 30 of the most significant, mature and respected companies in the world. Investing in the index itself over the long term is a fairly sensible strategy. The "Dogs of the Dow" is a variation on this strategy developed in 1972 in an attempt to beat the overall index.

The strategy involves building a portfolio equally distributed among the 10 companies in the DJIA that have the highest dividend yield at the beginning of the year, then readjusting this portfolio on an annual basis to reflect any changes that have occurred to these 10 companies throughout the calendar year. By buying these companies, you are essentially buying the cheapest stocks in the DJIA - companies that are temporarily out of favor with the market but still remain great companies. Of course, the hope is that the true value of these bargain stocks will be realized, and you will be able to capture a tidy profit at the end of the year by selling them and buying the new "Dogs of the Dow". When you readjust your portfolio to include the new dogs, you are just buying the stocks that are currently out of favor with the market and waiting for them to go up.

From 1957 to 2003, the Dogs outperformed the Dow by about 3%, averaging a return rate of 14.3% annually, whereas the Dow's averaged 11%. The returns between 1973 and 1996 were even more impressive: the Dogs returned 20.3% annually, while the Dow's averaged 15.8%. However, you should always remember the important caveat attached to almost any investment strategy: Past performance does not guarantee future results. So, although the Dogs have performed well in the past, there is no guarantee that this trend will continue.

To learn more, read Barking Up The Dogs Of The Dow Tree.

RELATED FAQS

  1. What is the relationship between minority interest discount and fair market value?

    Learn how to determine the fair market value and minority interest discount for the sale of a share of a closely held corporation.
  2. How does the price of oil affect the stock market?

    Read about how the price of oil might impact the stock market and why economists have not been able to find a strong correlation ...
  3. Why is the Weighted Alpha important for traders and analysts?

    Learn about the weighted alpha indicator, and see how traders and analysts use it to spot securities with momentum is building ...
  4. What strategies are used in a redemption mechanism?

    Find out how the ETF redemption mechanism works and how authorized participants arbitrage ETF shares to bring them in line ...
RELATED TERMS
  1. Institutional Ownership

    The amount of a company’s available stock owned by mutual or ...
  2. Market Value

    The price an asset would fetch in the marketplace. Market value ...
  3. Acquisition

    A corporate action in which a company buys most, if not all, ...
  4. International Finance Corporation

    The International Finance Corporation is an organization dedicated ...
  5. International Finance

    Definition of international finance
  6. Bulldog Market

    A nickname for the foreign bond market of the United Kingdom. ...

You May Also Like

Related Articles
  1. Stock Analysis

    How You're Probably Using a 3M Product ...

  2. Stock Analysis

    The World's Top Ten News Companies

  3. Investing News

    Looking To Invest In U.S Start-Ups? ...

  4. Investing Basics

    Why did Berkshire Hathaway create Class ...

  5. Investing Basics

    How a Stock Buyback Works: MasterCard

Trading Center