The Dogs of the Dow strategy is fairly simple. At he beginning of the year, buy equal numbers of the shares of the 10 companies in the Dow Jones Industrial components with the highest dividend yields. Re-balance the portfolio annually, which means, sell the companies that no longer on the top 10, and buy the ones that are; therefore, at the beginning of the following year, after the re-balancing, you still own the 10 Dogs of the Dow. This is a value driven approach investment strategy because the principal is that the highest dividend-yielding stocks can happen to be the cheapest. Even in a bear market, this strategy offers you some sort of protection. If your average dividend yield is 4%, the market is down 8% for the year, you only lose 4%.
Historically, this strategy has worked because buying stocks at a low valuation generally yields a better return. This is a simple bargain hunting approach.
One caution though is that these stocks are not high flyers during a strong bull market. However, the strategy outperforms over the long term.
If you don’t have enough capital to buy the 10 Dogs of the Dow, you have other options. One of them is to consider an ETF that implements a “Dogs of the S&P 500” strategy. It’s the same concept, but instead of owning the 10 Dogs of the Dow, this EFT, SPYD, buys a portfolio of 80 of the S&P’s highest yielding stocks and allocates them on an equal-weight basis. This fund’s expense ratio is 0.12%, which is relatively low. At the beginning of the year, the EFT was trading at $29. It is currently at $33.64 It is up a whopping 16% so far. That is even before considering the dividends. In comparison, Dow, S&P, and NASDAQ are up between 4% and 5% year to date.