NEW LOW OBSERVER

The Dogs of the Dow investment strategy is designed to take advantage of high quality stocks that are undervalued within the Dow Jones Industrial Average.  The “dogs” are the ten stocks with the highest dividend yield in descending order.  Courtesy of the website Dogs of the Dow, we are presenting the performance of this investment strategy compared to the Dow Jones Industrial Average since 1996:

In prior articles (Part 1 & Part 2), we have proposed that using the same narrow group of stocks and applying various methods can generate far greater returns.  However, as investors, our primary consideration isn’t as much about profits as it is about losses.  We would rather know, in advance, what to expect when markets are falling rather than when they are rising.  Below we have outlined the performance of the Dogs of the Dow (and others) when the Dow Jones Industrial Average has declined in 2000, 2001, 2002, 2008, and 2015.

• Dogs of the Dow: Part 1
• Dogs of the Dow: Part 2

To refresh, the Dogs of the Dow investment strategy is based on the work of Michael O’Higgins’ book Beating the Dow.  This approach is by no means the first attempt at a mechanized approach to investing in the Dow Jones Industrial Average.  The June 1951 Journal of Finance article by Henry S. Scheider titled “Two Formula Methods for Choosing Common Stocks” was the earliest system that we could find which covers a similar investment strategy as Dogs of the Dow from 1914 to 1948.  The results give mixed picture on he data presented (we’ll have to save that for another day.)

When looking at the website Dogs of the Dow, we find a complete list of annual performance of stocks and their performance from 1996 to the present.  In our posting of Part 1, we showed how the Dogs of the Dow performed from November 4, 2016 to November 15, 2017.  We also compare the performance of the highest yielding stocks to price-to-earnings, price-to-book and lowest dividend yield.  The results confirmed what we’ve seen in the performance reviews of the U.S. Dividend Watch Lists.

In an attempt to better understand the data and avoid the bias that goes along with data that we find appealing to our senses, we’ve generated a breakdown of the Dogs of the Dow  for 2017 and compared it to the 2017 year-to-date YTD performance of the various fundamental metrics to see what would have generated higher returns, if at all.  In addition, we’ve included the top three and top ten (traditional Dogs) to see if there is any material difference in performance over the covered period in question.

In Part 3 of this series on the Dogs of the Dow, we will see how the stocks perform in the year 2008.  Thus giving us a more complete picture of the risks associated with using a mechanical investment strategy.