The Dogs of the Dow strategy uses dividends to find out-of-favor stocks that can beat the market. Instead of looking at the broad market or even the 500-stock universe of the S&P 500, this strategy focuses on just the 30 stocks that constitute the Dow Jones Industrial Average (DJIA), specifically the ten most beaten-down stocks of the Dow (the Dogs of the Dow).
Mastering the Dogs of the Dow strategy
The Dogs of the Dow strategy is deliriously simple:
List the yields of all 30 Dow stocks.
You can find a list of the 30 Dow stocks at most financial Web sites.
Buy the ten highest yielding stocks in the Dow in equal dollar amounts.
Hold your shares for a year.
Repeat Steps 1 through 3, selling any shares that don’t make the cut.
On average, four stocks fall off the list each year.
If you don’t have enough money to buy ten stocks or want a more concentrated, less diversified portfolio, buy five stocks. After making a list of the ten highest-yielding Dow stocks, identify the five on that list with the lowest share prices. This approach gives you the five high-yielding/lowest-priced stocks, known as the Small Dogs or Puppies of the Dow.
Investing in the Dogs through mutual funds
Because of SEC restrictions, no mutual fund is allowed to own only 10 stocks. However, a few mutual funds use the Dogs of the Dow as a basis for their portfolios, including the following:
Hennessy Total Return (HDOGX)
Hennessy Balanced (HBFBX)
Payden Growth & Income Fund (PDOGX)
Elements Dogs of the Dow (DOD), an exchange-traded note that tracks the index
Exchange-traded notes (ETNs) aren’t the same as ETFs. They don’t hold any stocks, but are subordinated debt (debt with less of claim on assets) issued by an investment bank. These notes have credit risk, which means the investor receives nothing if the issuer goes bankrupt.