Dogs of the Dow

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The Dogs of the Dow is an investment strategy popularized by Michael O’Higgins in his 1992 book Beating the Dow.

The Dogs of the Dow is a contrarian strategy based on choosing the highest dividend yielding stocks from the Dow Jones Industrial Average. O’Higgins argued this method allowed the investor to choose strong blue chip companies that are just facing temporary financial problems. As evidence for this method, he looked at the 18 previous years from 1992 and found the method beat the DOW returns substantially. As the popularity of this method grew, the returns began to dwindle and was finally abandoned by many investors. Burton Malkiel, in his book A Random Walk Down Wall Street, declared the Dogs of the Dow strategy to be a “potshot that completely misses the target.”

 Is it possible this strategy may again start working now that it is out of favor? The ideas presented by O’Higgins were very interesting and had me thinking more about contrarian investing, as well as methods that choose stocks based on simple screens. While it seems that many investors have some success with mechanical methods for stock picking, this is probably only a good place to start when searching for investment ideas. I would have to look more deeply into the financials of a company before feeling comfortable buying shares of a stock. This is where the contrarian side of the strategy becomes interesting. The stocks chosen by the Dogs of the Dow methodology will no doubt show poor financial progress over the prior year. The difficulty arrises when it must be determined whether these poor numbers are temporary or represent more severe financial issues. Many companies on the current Dogs of the Dow list show terrible debt and liquidity ratios. Are these numbers just temporary roadblocks to the future growth of the companies, or are these serious problems that should dissuade an “intelligent investor” from thinking about these companies as viable portfolio options? This will be a question to keep in mind as I continue to study security analysis.

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