Today’s brief edition of “Money in Motion” examines the dividend strategy known as Dogs of the Dow and offers you our own pick among this year’s Dogs for outperformance in 2016.
To begin, as classic chartists, we ourselves almost never engage in the business of buying weakness for the sake of weakness. Classic charting favors securities exhibiting positive (and improving) relative strength to the market, favors momentum, favors “success”, while buying the 10 stocks in the Dow Jones Industrial Average with the highest dividend yields at the end of each year is literally doing the opposite. It is buying stocks that almost certainly are in downtrends that very likely have underperformed the market over the preceding twelve months. It’s a strategy – as its name implies – that favors losers over winners.
And even though buying a stock in a downtrend is one of the worst things one can do in investing… Dogs of the Dow strategy is not so much a strategy of buying stocks that are down sharply (even though in effect that is what one ends up doing), as it is a strategy of buying stocks with high dividend yields.
To that end, while the Dogs of the Dow strategy over the past 15 years or so has beaten the market only about half the time, the strategy has produced meaningful excess returns since it was popularized by Michael B. O’Higgins in 1991. Further, when considering total return rather than absolute performance alone, the Dogs of the Dow strategy is a decided winner.
The premise, of course, is that so-called “Blue Chip” companies (companies that populate the Dow Jones Industrial Average) do not alter (read: cut) their dividends casually on account of year-over-year fluctuations in their business. As such, DJIA companies with a high yield – the argument goes – are near the bottom of their business cycle and are likely to see their stock price rise faster than low-yielding companies.
In any event, our pick for 2016 among the 10 Dogs of the Dow of 2015 is Procter & Gamble. And said pick is based solely on a technical basis, without any consideration of the fundamental underpinnings of the company, its prospects going forward, or its valuation at present.
Trade well,
-Carter
