Refining Dogs of Dow strategy

Dogs of Dow is quite popular and even some mutual fund managers are using it. In a nutshell, you buy the ten Dow stocks that pay the highest dividends and repeat the process every year. It does not perform well in last decade except the last two years. The better performance of the last two years could be due to the recent mild bubble on dividend growth stocks as described in at least two WSJ articles. Hence, watch out when the bubble bursts.

When a strategy becomes headline, it will not perform due to the herd mentality. Hopefully we customize the strategy so we will not pick identical stocks as others.

I have my own Dogs strategy. I'll disclose the concepts here. One version has an average annualized return of 15% (12% appreciation + 3% dividend) from Nov. 1, 2000 to Nov. 1, 2010. Buy 5 candidates on Nov. 1 and sell them on May 1 next year. If you have a historical database, try it out and share your findings.

Refining Dogs of Dow:

1. You can include S&P 500, so you have 500 more stocks to choose from.

2. You can adjust the time between Dec. 1 and Dec. 15 (a little earlier is fine) to avoid the herd who follows the same strategy and performs the same task at around the beginning of the year.

3. For non-retirement accounts or you have short-term losers to offset, try to buy on Nov.1 and sell on May 1 to take advantage of this normally favorable period.

4. Sort the selected top 10 with positive earnings by P/E and buy the lowest 5. A value play.

5. Avoid the following sectors as their problems/values are not shown in financial statements: lenders (on the quality of mortgages), drug (generic is OK) and miners.

6. Check any major lawsuits against the companies.

7. Skip the short % ( = No. of shares shorted/Total floating shares) higher than 10.

8. When we're in the second year of recovery, use stop loss or watch your portfolio every week as it is closer to the peak of a market cycle. This is the riskiest time of the market.

It is a lazy man's stock picking and market timing. I bet it performs better than selecting stocks with a hundred of monkeys throwing darts at stock listings, termed as the so-called efficient theory. Some received Nobel prizes on the theories which are proven to be wrong. It shows how out of touch the Nobel committees were/are. Well, they gave Obama one for doing nothing and nothing to Uncle Deng who saved millions from starvation and moved China to second economy.

Related links.
The best strategy that works best.

Is dividend stocks better deal?

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(c) TonyP4 2012. Written in 1/8/12.

Disclaimer:

Do not gamble your money you cannot afford to lose. Past performance is a guideline and does not guarantee future performance.

All my posts are for informational purposes only. I'm not a professional investment counselor. Seek one before you make any investment decision.