Stocks & Commodities V. 30:13 (80-82): Don’t Ditch The Dogs Of The Dow by Teresa Fernandez

Don’t 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 public’s 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 2000–11 inclusive (a 12-year period), using the following rules: First, the yield is calculated by taking the previous year’s 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 McDonald’s (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.