Investing in the Dogs of the Dow

As you know, I have been in Honduras and have limited ability to communicate.  This is only the second time that I have been on the internet in almost one week so I wrote this post offline and was able to upload it during one of the rare times I had access.  It helps make me realize how fortunate I am to live in the United States where I can have clean, hot water at any time and wireless access in my home.  The restaurants and hotels in the US are not under armed guard which is also very nice.  Anyway, on to the post.

The Dogs of the Dow

There is an investing technique that attempts to take advantage of the highest yielding dividend stocks in the Dow as a means of buying low and selling high.  It was popular in the 1990′s but I hadn’t heard much about it recently although in the current environment, I am wondering if it is worth a look.

The idea is that as a dividend paying stock decreases in price, the yield on that stock will increase.  Thus, the higher yielding stocks in the Dow would be selling for a low price relative to the market and their historical value while those that have low yields would be at higher prices or may not even be paying dividends at all.

Since the history of stock market returns has been that the dividends paid by stocks represents roughly half of the overall return of the market, it is important to be holding dividend paying stocks as part of an investment portfolio.

Since the Dow is composed of large companies which have been included in the index based upon their importance to the overall economy, theoretically the companies should be relatively safe investments.

I know that wasn’t the case with General Motors recently, so it will be worthwhile to pay some attention to overall trends to make sure that the company can continue to pay those dividends.

Creating a Dogs of the Dow Portfolio

The process for investing in the Dogs of the Dow is relatively simple.  Take the 30 stocks that compose the index and list them in order of yield from the highest to the lowest.  There is even a website, DogsoftheDow.com, that will do this for you.

Invest equal amounts of money in each of the ten highest yielding stocks and rebalance once per year.  You can even wait for one year and one day to take advantage of the lower tax rate on long term capital gains.

There are a few variations that can be done.  One can invest in the five lowest priced stocks out of the original ten Dogs.  This technique is called the Small Dogs.

You should take some time to look over the website that I mentioned, look at the historical returns, and see if this technique of stock selection and investing for dividend yield might be right for you.

Please take some time to offer your comments below.  I will be back in the United States in about 48 hours so I can begin to discuss again.