Subject: Strategy - Dogs of the Dow

Last-Revised: 10 Jul 1998
Contributed-By: Raymond Sammak, Chris Lott (contact me) Ralph Merritt

This article discusses an investment strategy commonly called "Dogs of the Dow."

The Dow Jones Industrials represent an elite club of thirty titans of industry such as Exxon, IBM, ATT, DuPont, Philip Morris, and Proctor & Gamble. From time to time, some companies are dropped from the Dow as new ones are added. By investing in stocks from this exclusive list, you know you're buying quality companies. The idea behind the "Dogs of the Dow" strategy is to buy those DJI companies with the lowest P/E ratios and highest dividend yields. By doing so, you're selecting those Dow stocks that are cheapest relative to their peers.

So here is the Dogs of the Dow strategy in a nutshell: at the beginning of the year, buy equal dollar amounts of the 10 DJI stocks with the highest dividend yields. Hold these companies exactly one year. At the end of the year, adjust the portfolio to have just the current "dogs of the Dow." What you're doing is buying good companies when they're temporarily out of favor and their stock prices are low. Hopefully, you'll be selling them after they've rebounded. Then you simply buy the next batch of Dow laggards.

Why does this work? The basic theory is that the 30 Dow Jones

Industrial stocks represent well known, mature companies that have strong balance sheets with sufficient financial strength to ride out rough times. Some people use 5 companies, some use 10, some just one. You might call this a contrarian's favorite strategy.

A 12/13/93 Barron's article discussed "The Dogs of the Dow." Barron's claimed that using this strategy with the top 10 highest yielding Dow stocks returned 28% for 1993, which was 2x the overall DJIA, 2x the NASDAQ, 4x the S&P500 and better than 97% of all general US equity funds (including Magellan). In the last 20 years, this strategy has lost money in only 3 years, the worst a 7.6% drop in 1990. In the last 10 years, it has returned 18.26%.

Merrill Lynch offers a "Select 10 Portfolio" unit trust, which invests in the top 10 yielding Dow stocks. Smith Barney/Shearson, Prudential Securities, Paine Webber, and Dean Witter also offer it. It has a 1% load and a 1.75% annual management fee, and they are automatically liquidated each year (cash or rollover into next year, but capital gains are realized/taxed). Minimum investment is $1,000.

A listing of the current "DOGS of the DOW" is updated every day on the "Daily Dow" page that is part of the Motley Fool web site: http://www.fool.com/DDow/DDow.htm

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