Dogs of the Dow
Published: January 1 2009 18:13 | Last updated: January 1 2009 18:13
In a year that saw sophisticated investment strategies fail spectacularly, one of the simplest left its fans hanging as well. American retail investors, armed with little more than a calculator, have run circles around most professionals over the years by buying the “Dogs of the Dow” – the 10 stocks out of the 30 Dow Jones Industrials with the highest dividend yield – each January. Owning these seemingly solid but out of favour stocks would have produced a 16.77 per cent annualised total return between 1945 and 1995, according to a study by Brigham Young University – 3 percentage points better than owning the index.
Loaded with duds such as General Motors and Citigroup in 2008, the Dogs lagged the broader average badly in its worst year since the Great Depression. And it was not only distressed companies. Even blue chips such as General Electric and DuPont were little help. Mercifully, Dow component AIG, down 97 per cent, yielded too little and did not make the list of Dogs for 2008.
Last year was a peculiar year in many respects. The Dogs’ slump makes it even more so, because they have tended to lag in bull markets, like that of the late 1990s, and outperform in leaner times. This will be fodder for money managers who scoff at such simplistic strategies.
But investors could do worse than eschewing expensive advice and adopting a formulaic approach. There is strong empirical evidence that dividend-paying stocks outperform non-payers in the long run. Furthermore, the benefits of diversification shrink rapidly once 10 stocks are owned. Investors who switch out the old Dogs for the new each year incur capital gains taxes. But typical retail funds have more turnover and higher fees to boot, mostly without the impressive track record of the Dogs. With their four shakiest members departing and a yield of 6.2 per cent, – nearly three times 10-year Treasuries – the Dogs may have their day again in 2009.
Copyright The Financial Times Limited 2009
Comments