Dow Dogs Make Their Mark With Pure Mechanical Approach

    by Wayne A. Thorp

    Regular readers of these stock screen articles know that we discourage viewing the results of any stock screening methodology as a “buy” or “recommended” list. Instead, we view the list of passing companies of any approach as a starting point, not the finished product. However, some quantitative approaches, by their nature, are purely mechanical—the final list of companies is what you buy. One such approach is the Dogs of the Dow, which was popularized in the book, “Beating the Dow” by Michael O’Higgins and John Downes (Collins, 2000).

    The “dogs” are stocks among the 30 Dow Jones industrial average companies that have the highest dividend yield (a company’s indicated dividend payment for the upcoming year divided by the current share price). These companies, on average, have the financial position, resources, and visibility to see them through any financial storms.

    The Dow Dogs methodology emphasizes out-of-favor Dow stocks that are possibly underpriced relative to others, as indicated by high dividend yields. Often, this is the result of the market’s overreaction to unfavorable short-term developments or business cycles. Over time, O’Higgins and Downes argue, the stocks will regain a value that reflects the actual underlying risk. Overall, the philosophy combines a strategy of investing in high-quality stocks with a contrarian approach.

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