Dogs of the Dow or ASX

The Dogs of the Dow strategy selects the ten highest-yielding Dow stocks annually, investing equally in each. The approach targets undervalued blue-chip stocks, seeking both dividend income and potential price recovery.

Investors divide funds equally among these stocks, holding them for a year to capture both dividend income and possible price recovery. The premise is that high-yielding stocks are often temporarily undervalued, offering potential for both income and price gains.

The Dogs of the ASX adapts this strategy for Australian markets. It uses the same rationale, where investors select the ten worst-performing dividend-paying stocks from the ASX 200 over the past year

While these strategies have historical merit, they carry risks. Some underperforming stocks may not recover as expected. Investors should research carefully and assess their risk tolerance before adopting this approach.

Here’s a detailed breakdown of the Dogs of the ASX on how this strategy is implemented:

1. Identifying the “Dogs”:

  • Dividend Yield Calculation: For each of the 200 companies in the ASX 200, calculate the dividend yield, which is the annual dividend per share divided by the current share price.
  • Ranking: Once the dividend yields are calculated, rank all 200 companies from highest to lowest yield.
  • Selection: The top ten companies with the highest dividend yields are designated as the “Dogs of the ASX” for the upcoming year.

2. Portfolio Construction:

  • Equal Investment: Allocate an equal amount of capital to each of the ten selected stocks. For example, if you have $10,000 to invest, you would allocate $1,000 to each stock.
  • Timing: Invest in these stocks at the beginning of the year, based on the yields calculated at the end of the previous year.


3. Holding Period and Rebalancing:

  • Duration: Hold the selected stocks for the entire calendar year (or 12 months).
  • Annual Review: At the end of the year, recalculate the dividend yields for all ASX 200 companies.
  • Rebalancing: Adjust the portfolio by selecting the new top ten dividend-yielding stocks and reallocating funds equally among them for the next year.

Variations of the Strategy:

  • Small Dogs of the Dow: This variation involves selecting the five stocks with the lowest share prices from the original ten “Dogs.” The idea is that these lower-priced stocks may have more room for price growth, more focusing on price growth, than growth and yield.

Considerations:

  • Simplicity: The strategy is easy to implement, requiring adjustments only once a year.
  • Risk Factors: High-yield stocks can be attractive investments, but investors should carefully examine why yields are elevated since unusually high yields may indicate underlying problems with the company.
  • Market Conditions: The effectiveness of the strategy can vary based on broader market and economic conditions.

The Bottom Line

The Dogs of the Dow strategy provides investors with a methodical way to select high-yielding blue-chip stocks, potentially benefiting from undervalued companies while earning consistent dividend income. However, investors should thoroughly evaluate their financial objectives and risk tolerance, and conduct comprehensive research before implementing this or any investment strategy.

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