Dogs of the Dow Investment Strategy

Active participation on the part of investors is observed when the question comes to researching and monitoring their investments. Even if they don't trade on regular basis, the trade of individual stocks is accompanied by extensive research and analysis of the target stocks.

On the other hand, there are many investors that lack the time to execute the required examinations. As a result they need investing techniques that will alleviate and facilitate their efforts in finding the right stocks.

"Dogs of the Dow" Investment Strategy

If you have only an hour free for making investment decisions each year, then the Dogs of the Dow investment strategy is what you are searching for. This is so, since it eliminates the research and guesswork from your investment decision making.

The developer of this technique of investing, most often classified as mechanical, is Michael O'Higgins, who first introduced it in one of his books in the early 1990s. When he first introduced the strategy, O'Higgins called for the use of the technique for the purpose of rebalancing the investment portfolio. However, feel free to use the Dogs of the Dow technique from the beginning. After some time has passed you can also use it to rebalance your portfolio.

Follow these steps in order to apply the Dogs of the Dow strategy:

Step 1

Examine the 30 stocks of the Dow. Look at their dividend yields and pick the 10 stocks that have the highest indicators regarding this factor. You should select stocks with high dividend yield because it sometimes indicates that the stock is undervalued. As a result you may expect the price of the stock to rise.

Step 2

After picking the 10 stocks, invest equal amounts of money in them and wait to see the result.

Step 3

This step should be undertaken after one year has passed. At that time look again at the Dow. Check which stocks are in the Dow by looking at their dividend yields. Those that are no longer there should be sold because their prices have already increased.

Step 4

Replace the sold stocks with stocks that are now in the top 10 of the Dow regarding their dividend yields following the same logic as in Step 1. These stocks should be selected because they represent under-priced stocks or stocks that have experienced a fall in their price.

Step 5

The final step includes the making sure that the stocks you sell are held for at least a year. This is required in order to be able to claim the profits you have made as a long-term capital gain. In this way you will be able to alleviate your tax burden.

The Success of the Dogs of the Dow

The Dogs of the Dow has proven its success many times by beating several times the S&P 500 Index. On the other hand, this technique has showed its shortcomings as well especially in the late 1990s when the tech boom has occurred. In the proceeding bear market the Dogs of the Dow again proved its efficiency. During the following years, the investing technique again lagged behind.

Final Piece of Advice

As you can see the success of this investing technique experiences its ups and downs. However, if you need an investing technique of a mechanical character, which lacks emotions, you should apply the Dogs of the Dow. Nevertheless, implement this technique being on your guard since the good past performance is not a guarantee of future success.

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