The "Dogs of the Dow" strategy has been used for over one hundred years by investors to outperform the market in a short-term timeframe. Developed by Charles Dow and refined by William Hamilton and articulated by Robert Rhea. The cornerstone of the Dow theory addresses Technical Analysis, price action, and market philosophy. It's a simple system any investor can use to outperform the market. Each and every year traders invest in the ten highest-yielding stocks of the Dow Jones industrials (INDU) around the last trading day of the year. There are a number of money managers, brokers, and individual investors diligently working on creating a portfolio of ten Dow stocks that have the highest yields. Therefore, billions of dollars flow from other sectors into the ten highest yielding Dow stocks. Investing in the ten highest-yielding Dow stocks during the period from 1973 and 1998 produced a cumulative total gain of 7,264%, a 17.9% annual compounded return. As compared to the 2,408%, or 13% annual gain in the other Dow 30 stocks. We're going to call the above scenario "Ten highest-yielding Dow stocks". Based on the above criteria we'll select our ten highest-yielding Dow stocks for this year. Ranging from the highest to the lowest yielding, our stock list includes; Philip Morris (MO), Eastman Kodak (EK), General Motors (GM), Caterpillar (CAT), Du Pont (DD), International Paper (IP), J.P. Morgan (JPM), SBC Communication (SBC), Exxon Mobile (XOM), and Minnesota Mining & Manufacturing (MMM). Just as a reminder the above were picked based on having higher yields than their other Dow counterparts. With that being said, we're going to look at another strategy that could generate superior gains and beat the money managers at their own game.
"Hot Dog Five"
This strategy picks the five lowest-priced issues among the ten highest yielders. By choosing the "Hot Dog Five" each year resulted in a 13,279% total return, or 20.7% annually, from 1973-1998. Once again we have our list and are more than happy to share it with our faithful readers. Based on lowest price in our ten highest-yielding Dow stocks, we came up with Du Pont (DD), Eastman Kodak (EK), International Paper (IP), Caterpillar (CAT), and Philip Morris (MO). Well, since you're all pretty excited by now, we're going to show one more strategy to beat the Dow.
Before we go on here we thought we should warn traders to sit down (if they aren't already) because this might blow your mind. Is everyone sitting down yet? Good, this last strategy picks just one Dow stock each year, the second lowest-priced stock of the ten highest yielders. Investor who did this fared the best with a 43,177% return, or 26.3% a year, from 1973 to 1998. Good heavens, you're all thinking, those returns are just huge and picking just one of the Dow components can do it. This year our second lowest-priced stock is SBC Communication (SBC). However, relying on just one stock can be extremely dangerous in some years. Considering the year Telecom Services have had and the recent low SBC just hit, it might better to focus on the ten highest-yielding Dow stocks, or the "Hot Dog Five."
Something to think about.
We're sure many readers are saying, "bunk, I'm an options trader not an investor." We hear you loud and clear! Isn't there an option available to still be able to play the long-term? They're known as LEAPS. Aha! Maybe we can benefit from some of the above historical "stock returns" in a LEAP play. IndexSybox.com subscribers might remember a LEAP play we profiled back in early October for shares of International Paper (IP) when the stock was around $28 and we liked the WNPAE or Jan02 25 Call (then near $12, now at $18.75). OK, what if I don't want to just "buy" all ten, but use some of the tools that I've learned over the past several months/years as it relates to technical analysis and put the odds in my favor to a higher level! I've got 10 stocks that I can pull up some charts on that will be the "Dogs of the Dow" candidates and start isolating those that look to be gaining some technical strength. During the year I might even monitor these 10 stocks as to their progress, just in case one of them breaks a long-term downward trend on volume.
SBC Communications Chart - weekly interval, last four years.
A weekly chart of SBC (second lowest priced) looks like a "little pullback" on the above chart. Upward trends are still intact and resistance is horizontal. Maybe, just maybe this stock would pull back to the low $40's and give LEAP players an opportunity to test some market historicals. Here's a little different way to try and get readers to think at the market from a different angle.