Invest in Stocks Using the Dogs of the Dow

Investing in stocks can be a daunting task when you consider that there are close to 5,000 different stocks listed on the New York Stock Exchange and Nasdaq.  An investor really has to have some way to pare that number down by using some sort of screening tool or system.  Well, here is a system that is not only easy to use but has been incredibly effective over the years at producing reasonable investing results.  In fact over the past 10 years, using the Dogs of the Dow system has produced an average annual return of 3.2% compared to 1.2% for the S & P 500.

The Dogs of the Dow strategy is fairly simplistic and doesn't take a lot of time to learn or use. In fact, only a few minutes each year is enough to implement the strategy.  It is based upon the desire that an investor wants to buy a stock at a low price and sell at a high price. Below I outline the basic investing strategy although there are several variations which I won't be discussing in this article.

The entire premise is based upon the fact that the stocks in the Dow Jones Industrial Average pay dividends.  Also, it is presumed that the member stocks in the DJIA are well established and stable companies.

As the price of the stock fluctuates, the annual dividend divided by the stock price will give you the yield of the stock. For example, Verizon has an estimated dividend of $1.95 for the next year. The stock price is $30.91. $1.95/$30.91 gives a yield of 6.3%. That is higher than a CD will earn over the next year! In order to utilize the Dogs of the Dow strategy,

1. Simply list all 30 stocks in the Dow Jones Industrial Average according to their yield from highest to lowest.
2. Invest an equal amount of money in the 10 stocks with the highest yield.
3. Ignore the stock market for one year and enjoy your life.
4. After one year, repeat step one. Sell those stocks that you own which no longer appear in the list and replace with the new ones. Keep those that are still in the 10 highest yielding stocks.
   

We all know that the price of stocks fluctuate with the economy or the sentiment of investors regarding a particular company.  But usually the fluctuation is much more severe than the actual real world results of the business.  As the price of the stock decreases, the dividend yield will increase meaning that the stock is relatively inexpensive compared to the other components of the Dow.  (Of course there are exceptions as in the case of General Motors which went bankrupt or the banks which eliminated dividends.  These stocks deserved to be inexpensive since the business was crumbling.  But this is likely a fairly rare event.)

The high yield can be a clue that the stock is cheap meaning the investor can buy low.  Then after waiting and collecting a nice dividend for a year, the value of the stock is reassessed.  If the stock has risen in price and no longer yields a lot compared to the other Dow stocks, then it is sold for a nice gain.  If the stock is still a high yielding stock, then it should be held until it gains in price to be sold high.

The buying and selling of a stock has become automatic based upon the dividend yield as compared to the other Dow stocks.  The system essentially forces an investor to buy low and sell high.  The stock that is sold for a profit is then replaced with another relatively inexpensive stock and the process is repeated year after year.  Of course there are times when the entire market will drop as in 2008.  The Dow stocks are not immune to such market forces.  But if you are looking for a fairly simple, straightforward method to pick and invest in stocks, you should consider looking at the Dogs of the Dow system.