Donít Ditch The Dogs Of The Dow by Teresa Fernandez
With just one modification, you can create a reliable variation
of a money maker.
Since its introduction, the dogs of the Dow strategy
has appeared in widely read publications and financial
websites. Dogsofthedow.com, which tracks the
performance of the strategy, has received accolades. Perhaps
the strongest proof of the investing publicís acceptance is
the fact that funds have been created to follow this strategy,
funds such as the Hennessy Balanced Fund (HBFBX) and
the Hennessy Total Return Fund (HDOGX).
Dogs of the Dow strategy
I tested the basic strategy of investing in the 10 highest-yielding Dow stocks for 2000Ė11 inclusive (a 12-year period), using
the following rules: First, the yield is calculated by taking the
previous yearís last-quarter dividend, multiplying it by 4, and
dividing that by the year-end price of the previous year. Why
not just divide the sum of dividends paid in the previous year
by the year-end price? Consider Alcoa (AA), whose 2009 yearend
price was $16.12 and the dividends paid in 2009 were from
first to fourth quarters: $0.17, $0.03, $0.03, $0.03.
The total of dividends paid in 2009 of $0.26 divided by
the year-end price of $16.12 would have given us a yield of
1.6%. However, dividend payments were reduced to $0.03
per quarter. Realistically, we can expect no more than $0.12
($0.03 x four quarters) in dividends for 2010, or a yield of
0.74%. As it turned out, dividends paid per quarter remained
at $0.03 throughout 2010.
Consider the opposite situation of McDonaldís (MCD), whose 2009 year-end price was $62.44.
Dividends paid in 2009 were from first
to fourth quarters: $0.50, $0.50, $0.50,
$0.55. The total of dividends paid in 2009
of $2.05 divided by the year-end price of
$62.44 would have given us a yield of
3.3%; dividend payments were increased
to $0.55 a quarter. We can expect to receive
total dividends of $2.20 in 2010, or a yield
of 3.5%. As it turned out, not only were
dividends increased to $0.55 in the first
three quarters of 2010, they increased
further in the last quarter to $0.61.
Second, dividends are reinvested per
quarter in the same stock that paid the
dividend, odd-lot, and fractional shares.
Third, and perhaps most important, rather
than calculate returns based on index levels
and stock prices, we will assume that at the
beginning of 2000, 100 shares of each of the
10 highest-yielding stocks are purchased for
a total investment of $56,689.50.