On many occasions, as investors, we are faced with the dilemma of how to invest in the stock market in the long term and obtain an adequate return, without having to spend too many hours.
No doubt “Dogs of the Dow” or in Spanish “Dogs of the Dow” is a very interesting strategy to get it. There are several ways to invest in companies that distribute dividends, as we will see below. We can either select the shares ourselves or directly choose ETFs that invest in companies with a good (or growing) dividend yield.
This strategy requires few changes in the portfolio for a year, so it is advisable to look for a broker to cover acceptable commissions and avoid, as far as possible, the custody commission. It is also important to keep in mind that it is not always a good time to buy, and having alerts on company prices as well as a good tracker of stocks and ETFs will come in handy when selecting values. For example, the Orange Broker of ING will not charge us the custody fee by making an operation in the natural semester; in its platform we have an improved tracker of actions and ETFs and also alerts for actions,
This type of longer-term strategies allows us sufficient flexibility to not be looking at prices or returns every day, so it is comfortable to continue with a broker of these characteristics.
What do the Dow Dogs consist of?
Dogs of the Dow is a long-term investment strategy that has been widely accepted by investors since its author Michael O’Higgins first raised it in 1991 in his book “Beating the Dow”
His proposal is based on creating a portfolio with 10 stocks with the highest dividend yield of the 30 companies listed in the Dow Jones Industrial Average (DJIA).
Generally at the end of the year the investor should make a review of his portfolio and replace the values that his dividend yield is outside the top 10 of the index or in case any company has left out. This strategy can also be adapted to other indexes such as ibex 35, SP 500, Eurostoxx 50, etc.
What is the investment philosophy of the “Dogs of the Dow” strategy?
The reasoning behind the strategy is simple:
It is based on relying on the 10 most lagged shares of the Dow, since they are good companies if they remain included in the DJIA and once these companies recover and the market has correctly revalued them to be able to sell them and replenish their portfolio with other good companies that are temporarily undervalued.
Arguments for and against
Proponents of this strategy have argued that Dow companies have historically been very stable companies able to withstand declines in the market based on the strength of their businesses.
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They are often companies with recurring and consistent income and profits.
In turn, they affirm that the existence of a Technical Committee that constantly reviews the components, assures that the index is formed by stable and solid companies.
The main limitation that can be raised is the possibility that any of the selected companies, being the most lagging, will be out of the index in some revision.
In addition it is pointed out that in a few years or short periods of time this strategy has not been effective in its objective of overcoming the benchmark.
Given its popularity have been appearing variants of such investment strategy, the most popular are:
Dow 5 or Small Dogs: consists of selecting among the 10 values selected in the initial strategy the 5 with the lowest price per action.
Dow 4: consists of selecting the 4 values with the highest price among the Dow 5.
Foolish 4: consists in the selection of the same values as the Dow 4 but weighing in the portfolio 40% to the action with lower price and allocating a 20% to the rest of the 3 shares.
What has been the performance of the “Dogs of the Dow” strategy?
Although there have been years in which this strategy has outperformed the Dow, statistics show that its performance over long periods of time has outperformed its benchmark.
For example in the period 1957-2003 the dogs outperformed the Dow by 3%, with an annual rate of return of 14%.
Within this period the performance between 1973-1996 was even greater as the rate of return was 20.3% (+ 5% against the Dow).
Dogs of the Dow Portfolio 2017
If we want to start a portfolio following this strategy, at any time of the year, we would just have to go to our broker’s website. Look for the Dow Jones Industrial Average and organize the values from highest to lowest dividend yield.
An example using the ING Direct orange broker platform would be as follows:
If we order the companies of each index (whether the Dow, the Ibex, the Cac, etc.) according to the dividend yield, we will find which companies fit our strategy to have them in the portfolio. If we make this review on a semi-annual basis, we should only sell the ones that do not appear in this list and incorporate those that did not appear before.
How to choose ETFs on dividends?
Thanks to the new ING Orange Broker crawler we have the option to look for the highest and lowest ETFs as well as by categories and subcategories, something very interesting that offers results very simply.
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You can access the new ETF selector by going into Orange Broker / Trading / ETFs. Once there you can filter the entire list of contractible ETFs according to the category you are most interested in. There are 5 categories: Index / Area / Type / Sector / Style.
If we entered the Style category we could find the subcategories that the image below shows us:
- If we select “Dividend”, we find two ETFs, the Lyxor ETF Select Dividend (+ 2.71% at 3 years annualized) and the Vanguard ETF Dividend Appreciation Index (VIG) with an annualized + 18% at 3 years.
- In this way we can buy such ETFs and not have to manage our portfolio, or combine high yield shares with an ETF so that we diversify our portfolio.
The Dow Dogs is a simple and effective strategy based on the results of the last 50 years of certain companies belonging to the Dow Jones Industrial Average.
- A brief summary of the strategy would be as follows
- Buy the 10 most profitable dividend yields of the 30 Dow companies
- Create a portfolio by weighing each asset equally between them
- Expect a return of more than 3% of the Dow, provided that what happened in the past is repeated.
As we said at the outset, if we cannot or do not like to keep an eye on the market, brokers such as ING’s Orange Broker allow us to alert both to the quotation prices of companies and ETFs and to the status of our orders Are executed or not). Among the types of orders, recently this broker has also included the Dynamic Stop, which has the advantage that the price of the Stop is moving parallel to the price of the quote if the movement is favorable and remains quiet if it is unfavorable. This type of order is especially useful for selling a position and guaranteeing a certain profit leaving the possibility that it is even greater if the market continues to rise.