Getting A Leash On The "Dogs Of The Dow"
12/14/99 9:20:36 AM
"An investment strategy that has gained in prominence over the past few years is the "Dogs of the Dow" approach. The theory is simple. Although there are varying forms of the strategy, its most common forms are to buy either the four or 10 stocks within the Dow Jones Industrial Average with the highest dividend yield. The thought being that the high-dividend yields are a sign that these stocks are undervalued relative to the rest of their Dow brethren. Over time, this strategy has been shown to have solid results, but that is really immaterial to the forthcoming discussion.
What is interesting about the strategy is that its popularity may actually be responsible for moving stocks rapidly near the end of the year, as practitioners of this theory rush to buy the required stocks. This appears to have been the case at the close of 1998. The first table below shows some of the top-yielding Dow names at the outset of 1999 - including Caterpillar (CAT), International Paper (IP), J.P. Morgan (JPM), and Minnesota Mining & Manufacturing (MMM). All were strong "Dogs of the Dow" candidates. Note how these stocks performed strongly in the three-week span from December 18, 1998 through January 8, 1999, although it should be noted that the S&P 500 Index (SPX - 1415.22) logged a 7.3-percent return over the same stretch.
Taking this line of thinking one step further, the question naturally becomes, what Dow stocks may benefit from the rising popularity of this investment strategy? The second table below shows the current list of the top-10 Dow stocks in rank order from highest dividend yield to lowest yield as of the December 13 close. It's pretty much the same cast of characters as in years past with one notable exception. The reshuffling of the Dow this fall which led to the inclusion of SBC Communications (SBC) places it number ten on the list. It will be interesting to watch the trading of SBC to see if it benefits from its inclusion on the list."
MO
JPM
EK
CAT
GM
3M
DD
IP
XON-MOB
SBC
Schaeffer's Investment Research |
