Dogs of the Dow are Winning

The “Dogs of the Dow” method of investing is making a comeback. The strategy which advises investors to purchase the 10 highest yielding Dow (NYSEARCA:DIA) stocks at the end of each year has a 5.5% return this year through Wednesday, compared to a 0.4% for the collective Dow.

The Dogs method has historically performed well but hit a slump over the last decade or so. From 1961 to 1998 the Dogs of the Dow outperformed the Dow by an average of 1.7% each year, but recently the investment plan has underperformed the Dow in 10 of the last 15 years.

This rule based purchase plan has its share of critics. A study done by the University of Kansas found that even during its hay day when it was outperforming the Dow (NYSEARCA:DIA), it was by such a small margin that the additional profits were negated by trading fees and taxes. The strategy also tends to have minimal diversification and puts the investor at the mercy of just 10 stocks. The method also does not take into account the financial strength of the top performing company stocks.

Many investors are now trying to use the foundation of the Dog’s strategy, but with a few tweaks to minimize risk. One variation proposed by the Wall Street Journal’s Jack Hough is through “exchange-traded funds that run periodic screens for high dividend yields.” Hough elaborates on the plan by saying, “They offer exposure to hundreds of stocks instead of just 10, while keeping expenses reasonable. And their current yields compare favorably with the 10-year Treasury yield of about 2%.”

The Wall Street Journal quoted Jeremy Schwartz, director of research at the Wisdom Tree investment firm who backed Jack Hough’s modifications. “The baby boomers will be retiring over the next two decades starting this year. They’re going to want investment income, which means dividend-paying stocks will be in strong demand.”