Dogs Of The Dow – Underperforming Last 15 Years

Dogs of the Dow

The Dogs of the Dow strategy is a simple stock picking strategy which consists of buying the 10 highest yielding stocks of the Dow Jones every year. Wash, rinse, repeat. It was created largely through data mining  and made popular by a US stockbroker in 1991. The back-tested results looked great – “you can beat the index without thinking!”. Of course, no strategy can consistently beat its benchmark all the time in perpetuity. The market has a funny way of assimilating new information. Very Borg-ish, that “market”.

15 Years to Dec. 31, 2009

Dow Jones Industrial Average: 11.0%
Dogs of the Dow Strategy: 9.0%

It’s the recent performance that’s changed things. If you look at the 1, 3, and 5 year excess compound returns of the Dow over the Dogs of the Dow: 5.8%, 6.5%, and 3.0%, respectively. This could be due to a few reasons, here are only three:

1. Market has adjusted to reflect the Dogs of the Dow strategy.
2. Front runners buy the next year’s dogs a few days/weeks before the beginning of the year, running up the price and negating the advantage for the blind strategy followers.
3. Value stocks had a tough time during the credit crisis in general.

Finally, all the backtested data do not include the extra costs associated with rebalancing the portfolio annually (brokerage costs and the triggering of capital gains). These frictional costs will reduce the performance of both the Dow and the Dogs of the Dow, but will have a greater impact on the Dogs which will have higher turnover.

Preet Banerjee
Preet Banerjee
...is an independent consultant to the financial services industry and a personal finance commentator. You can learn more about Preet at his personal website and you can click here to follow him on Twitter.
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Showing 11 comments
  • Michael James

    A friend of mine from University made a life plan to support his family using the Dogs of the Dow approach. This was nearly 20 years ago. I’m assuming he went out and got a real job at some point.

    • Preet

      Yikes! Sometimes a little knowledge is a dangerous thing.

  • larry macdonald

    Preet
    As a side note, the Canadian version of the Dogs of the Dow seems to still be doing well. David Stanley’s Beating-the-TSX approach has averaged an annual gain of 12.6% from 1987 to 2009, compared to 10.2% for the benchmark index (source: Stanley’s annual update in the June, 2010 issue of Canadian MoneySaver). The approach rebalances at the end of May to the 10 highest yielding stocks in the Dow Jones Canada Titans 60 index. But perhaps it will eventually experience the same fate as the Dogs of the Dow approach as it becomes better known?

    • Preet

      I believe there is a good chance of that, yes. In either case though (US or Canadian), if the strategy makes sense to an investor and they can stick with it then that is more important to the investor’s success. Very few investors capture the returns offered by various strategies because they can’t stick with the strategies through thick or thin.

  • dave

    Excellent work ‘Grasshopper Preet –

    I think we should take your report and make dunce hats for those idiots at Motley Fool

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