The Dogs of 2010 beating the Dow

19th May 2010

The Dogs of the Dow is an investment theory that's been around since 1991, when a certain Michael O'Higgins published a book that advocated buying the ten highest-yielding shares in the Dow Jones DJ-30 index every January.

The expectation being that they would outperform the market in the next twelve months.

Then, the following January, you'd simply sell any of the Dogs that didn't make it into the top ten yielders' list any more, and replace them with the ones that did.

According to O'Higgins, his strategy would have beaten the Dow by an average of 6% a year during the late 1970s and 1980s.

Which would have made you very wealthy indeed.

The real question is, does it work?

Well, we'd have to say that last year it didn't. The 2009 Dogs recorded an average total return of 16.9% (including dividends), against 22.7% for the Dow Jones Industrial Average.

That's largely because 2009 was a dreadful year for banks, which skewed the results somewhat.

And in 2008 (another shocking year for banks), it lost a massive 38.8% against the Dow's 31.9% fall.

But it does tend to do well during up-phases: by mid-May 2010 the Dogs had made a 2.3% profit, against the Dow decline of 0.5%.

Over the last ten years it's achieved half as much growth again as the landmark S&P 500 index.

And, as we've seen, it handsomely beat the markets during the 1980s and 1990s.

Take the banks out of the equation, and you improve the odds.

This year's crackers

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