Dogs of the Dow: A Nifty Strategy for Potentially Increasing Yield in Your Living Trust
dog of the Dow
Inflating yield – while maintaining a suitable grant – is sometimes a hard trick for curators of living trusts. But one tool you can pull out of your kit is the “Dogs of the Dow,” a contrarian technique engineered to doubtless increase yield and expansion. First put forth by Michael O’Higgins in his 1991 book, “Beating the Dow”, the method itself is the model of simplicity.
You choose the ten DJX stocks with the highest dividend yield and one year later rebalance to the new ten with the highest yield. Looking backwards to 2004, average yield for the DJIA was around 2 percent. The “Dogs,” as of the start of the year, had a yield of 3.61%. At the end of the year, the total returns ( including dividends ) of the dogs were 4.5%. The DJX industrials had a return over the same period of time of 5.31%. ( For a total list of the 2004 “Dogs of the Dow” e-mail me at Dahlkefinancialsbcglobal.net ).
For those puzzling over what the worst performing stocks in the dogs were in 2004, look no farther than Merck, which turned in a thirty percent drop, and General Motors, which fell by 25 percent. Risk is implicit in all investing and this isn’t an exception. Studies are inconclusive when comparing the total returns of the whole DJX with the total returns of the Dogs over long amounts of time.
Both have streaks of over or under performance without any discernable reason. Since this is a continuing debate between fans and critics, a fast read of the web will give you all the required reading material you may want on the topic. Irrespective of the debate, I do not believe this changes the utilization of the “Dogs of the Dow” in a trust that’s trying to find increased yield while still looking for capital expansion. The simple alternative for revenue is to extend your bond grant, but that doesn’t address the capital expansion aspect found in stock.
Two remaining points :
Although it is not unusual for this method to start and finish on a calendar year, it isn’t critical to do so. Returns, naturally, will differ dependent on the dates used. MSN Cash is a good net source for the prevailing list. Type “Power Searches” in the MSN search box and go to “Dogs of the Dow.” You need to also know that diverse offshoots of the Dogs of the Dow have appeared recently.
These include what the Motley Fool has called the “Foolish 4 Strategy,” as well as other permutations that either contract or expand the base ten stocks in the dogs. Naturally, it’s important to recollect that investment returns and principal value will vary, so it is always feasible to lose money. No system can assure success or prevent loss.