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Posts Tagged ‘dogs of the dow’

Buying Only Stocks that Pay Dividends

I recently ran across a video at Kitco’s Video News page that featured an interview with Kevin O’Leary who is a Canadian entrepreneur who founded SoftKey, a software company that eventually acquired The Learning Company before selling out to Mattel.  Apparently, he is also on the show Shark Tank on ABC which I have heard about but never bothered to watch.

I don’t think it is important to watch the full video, but I do think that he made one very important point which I will share with you and which I am working on implementing:

  • Never buy a stock that doesn’t pay a dividend!

It is really quite simple and makes a lot of sense.  He doesn’t look at earnings when evaluating a stock.  He looks at free cash flow and wants to make sure that some of that cash is being returned to the owners (the shareholders) of the company.

A Transition in Thinking

I am starting to see from where he is coming.  Much of the market’s return has been the result of dividends.  Just take a look at the following graph which I found at The Market Oracle:

If this graph doesn’t convince you of the importance of dividends, which account for over half of the S&P 500’s, then how about I show you another graph that looks at the performance of the Dogs of the Dow vs the S&P 500.  In case you didn’t realize it, the Dogs of the Dow are those stocks in the 30 from the DJIA that have gotten so beat up in terms of price, that their dividend yield is among the top 10 of those 30 stocks.

No Lost Decade for Dividends

So had you been holding stocks that paid dividends, there really would not have been a lost decade.  You would have received consistent payments of cash to add to your portfolio enabling it to grow and make money.  You can just look at the graph and see that the S&P 500 lost money during the decade that saw two major shocks.  And yet, stocks that paid dividends (namely, the Dogs of the Dow) actually made money.

Fortunately, it is possible to teach this old dog some new tricks.  That is why I am simply working on changing all the stocks in my retirement accounts to dividend paying stocks and tracking my dividend income this year.  I did manage to hit my goal for the 1st quarter.  Over the next 25 years, I will allow those accounts to grow and reinvest those dividends into more stocks.

In fact, I will probably buy some more STX and INTC this week since they have been holding up quite nicely during this recent market decline.  I will also watch the ONXX $46 puts get exercised on Friday so I can start my purchase of Nucor (NUE) next week.  I won’t get the dividend for this quarter, but should be in a position to pick it up in the third quarter.  The same holds true for INTC and STX since the ex-dividend date has passed.  Nevertheless, adding to these positions is just a good idea.

Obviously, I will continue to publish the quarterly update on the dividend progress and see if it continues to grow.  According to the charts above, it should be a great plan!

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22 comments - What do you think?  Posted by Cash Flow Mantra - May 15, 2012 at 8:04 am

Categories: Investing   Tags: , , , , , , ,

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.

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10 comments - What do you think?  Posted by Cash Flow Mantra - October 28, 2011 at 9:34 am

Categories: Investing   Tags: , , , , ,

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