In the early 90's a small group did some research and introduced the world to what is now known as "the Dogs of the Dow" strategy. Their first publication of their strategy made quite a splash, including having a few mutual funds based on the strategy. Why? Well, the technique, which we will describe below, seemed to work well. According to the authors, following the method from 1973 to June 1991 would have made a cumulative profit of 1,753.14% compared to the complete Dow return of 559.31%, (not including commissions and taxes). As fantastic as that seems, it's just 16.61% annually for the Dogs and 10.43% for the regular Dow stocks.
According to their own research, in 13 of 19 contests, or 68% of the time, the Dogs beat the Dow. However, according to one source, the Dogs only beat the Dow once in the last 5 years (in 2006). As of the end of 2008, the Dogs have posted annual returns less than the Dow stocks in each of the last 1, 3, 5, 10, and 15 years. It's as if once a technique becomes well known, it stops working.
There are other variations of the Dogs of the Dow, namely the Flying Five, Little/Small Dogs of the Dow, Foolish Four, and Penultimate Profit Prospect. The Flying Five, Little Dogs, and Small Dogs of the Dow (all are synonyms) have flopped (failed to consistently outperform the Dow) over the last 1 to 15 years as well, according to traders that back tested each result.
So let's get to the specific rules of the strategy as explained by the original authors:
Dogs of the Dow setup.
1.At the end of each year (or any period you choose), rank the stocks in the Dow Jones industrials according to yield (dividend/price).
2.Select the 10 with the highest yields. In case of a tie, select the stock with the lowest price.
3.Buy an equal dollar amount of each stock.
4.Hold those stocks for a year then go back to step 1.
The 2016 list of stocks in order from highest to lowest yield.
- Verizon (NYSE: VZ)
- Chevron (NYSE: CVX)
- Caterpiller (NYSE: CAT)
- International Business Machines (NYSE: IBM)
- Exxon (NYSE: XOM)
- Pfizer (NYSE: PFE)
- Merck (NYSE: MRK)
- Procter & Gamble (NYSE: PG)
- Wal-Mart (NYSE: WMT)
- Cisco (NASDAQ: CSCO)