How Dogs of the Dow Works? : NobleTrading Blog

Friday, February 5, 2010

How Dogs of the Dow Works?

Dogs of the Dow investing strategy tries to beat normal market returns via a passive investing strategy that takes only a little time. Although it is regarded as a contrarian investing strategy where investors move against the market, it is not like that always. A Dogs of the Dow investor simply invests equal amounts of money in 10 Dow Johns Industrial Average stocks having the highest dividend yield at the start of a year.

The Dogs of the Dow strategy holds that the high dividend ratio of a stock indicates that the stock is cheap (oversold), and the faith of the company management on the company's future performance. Thus investing in them holds a dual benefit: the above average price increases once the market realizes the true potential of the stock, and relatively high dividend yield. With dogs, there is no need of extensive market understanding or technical analysis. The steps involved in the strategy are,

After the market close of the last day of the year, 10 stocks with the highest dividend yield are identified from 30 DJIA stocks. Now there are many sites/resources which provide this list.
The investor invests equal amounts of money in each stock.
At the start of the next year the same process is repeated.
Selling of old stocks and buying new, investors can sell off those stocks that are out of the Dogs list and buy those that have got into the list.
The investor should sell-off the stocks they are holding after one year and one day; thus he can qualify for long-term capital gain tax benefits.