Dogs of the Dow

Q: My advisor suggested I buy the 10 highest dividend-paying stocks from the Dow. Is this a worthwhile strategy?

A: This is known as the "Dogs of the Dow" strategy. In this mechanical and easy to implement approach, you purchase an equal amount of the ten Dow Jones Industrial Average stocks with the highest dividend yields and hold them for one year. At the end of the year, you sell any that fall out of the top ten and purchase their replacements on the list.

The strategy recognizes that the 30 stocks in the DJIA are an elite group of top-quality stocks. By purchasing the 10 with the highest dividend yields, you're generally buying those that are cheapest relative to their peers. Since they are still among the top companies in the world, hopefully their relatively low valuations will improve throughout the year.

The Dogs of the Dow strategy has moved in and out of favor in recent decades, and its results have run hot and cold as well. With dividend-paying stocks once again in the spotlight, the strategy is back in the public eye. However, there are a couple of reasons to be wary of such an approach. First and foremost, we don't recommend individual stocks for most investors, believing instead that mutual funds are generally a better choice. Mutual funds offer far better diversification than most people can afford in a portfolio of individual stocks. Second, a tremendous amount of attention has been drawn to the Dogs strategy over the years. Any time a relatively obscure approach reaches a state of broad acceptance, there's always the question of whether it will continue to perform as well as it has in the past. In short, there's plenty of reason to be wary of the Dogs. If you proceed, we'd recommend limiting it to a relatively small part of your overall portfolio.

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