Dogs Of The Dow

The Dynamic Wealth Report
December 31, 2007

Does This Investment Strategy Still Work?

A funny thing happens on January 2nd of every year.  Hundreds and thousands of investors wake up and run to their computer like it's Christmas morning.  They're in a huge rush to do a few quick calculations and determine their investment strategy for the new year.  Based on this little bit of math they blindly make all of their investment decisions.

It’s a simple strategy.  With a strategy based on the stocks that make up the Dow Jones Industrial Average, these investors are looking for high dividend yields.  Their hope (like very investor) is to outperform the market.

So, what strategy am I talking about?

The "Dogs of the Dow" investment theory of course.  In 1991 Michael O’Higgins published a book called “Beating the Dow.”  Michael, according
to his own biography, is widely considered one of the best investment managers in the US.  He started on Wall Street in 1971 and founded his own money management firm in 1978.  In this book he put forth a very simple strategy of buying the 10 Dow stocks with the highest yields.

Over the long-term, say 15 years, the Dogs of the Dow strategy had outperformed not only the Dow Jones Industrial Average, but the S&P 500 as well.  Sounds great, huh?

The problem . . . it doesn’t work so well anymore.

In the last 5 and 10 year periods, the strategy actually underperformed the market.  In the go-go days of the internet, people were less focused on traditional businesses that paid dividends.  As a result, the strategy failed to beat the averages.  Further, in 2004 and 2005, the strategy failed again - miserably.

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•   Farm Products (Up 55%)

Once again an industry related to agricultural leads the sector.  The Farm Products group rallied more than 55% over the last month, led by Archer-Daniels-Midland (ADM).  Strength in the agricultural industry continues on a global basis.

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