The Dogs of the Dow strategy is a simple stock picking strategy which consists of buying the 10 highest yielding stocks of the Dow Jones every year. Wash, rinse, repeat. It was created largely through data mining and made popular by a US stockbroker in 1991. The back-tested results looked great – “you can beat the index without thinking!”. Of course, no strategy can consistently beat its benchmark all the time in perpetuity. The market has a funny way of assimilating new information. Very Borg-ish, that “market”.
15 Years to Dec. 31, 2009
Dow Jones Industrial Average: 11.0%
Dogs of the Dow Strategy: 9.0%
It’s the recent performance that’s changed things. If you look at the 1, 3, and 5 year excess compound returns of the Dow over the Dogs of the Dow: 5.8%, 6.5%, and 3.0%, respectively. This could be due to a few reasons, here are only three:
1. Market has adjusted to reflect the Dogs of the Dow strategy.
2. Front runners buy the next year’s dogs a few days/weeks before the beginning of the year, running up the price and negating the advantage for the blind strategy followers.
3. Value stocks had a tough time during the credit crisis in general.
Finally, all the backtested data do not include the extra costs associated with rebalancing the portfolio annually (brokerage costs and the triggering of capital gains). These frictional costs will reduce the performance of both the Dow and the Dogs of the Dow, but will have a greater impact on the Dogs which will have higher turnover.