2010 Dogs of the Dow – Use Strategy With Caution

With 2009 coming to a close, and a new year around the corner, many investors are rightfully thinking about cleaning the slate and starting with a fresh portfolio for 2010. One of the stock-selection tactics used to fill in the missing portfolio blanks is the increasingly popular ‘Dogs of the Dow’ strategy. Though rules-based picks are generally fruitful – thanks to built-in discipline – the Dogs of the Dow strategy presents something of a problem…. it doesn’t work much better than a coin toss.

What is the strategy?: Using the ‘Dogs’ selection technique is almost stupidly simple. At the end of the calendar year, identify the ten stocks that have the highest dividend yield among the thirty stocks that make up the Dow Jones Industrial Average. These ten stocks have historically (though less and less) outperformed the Dow during the next calendar year.

Historical success is hit and miss: Take ‘historical outperformance’ with a grain of salt. Prior to the mid-90’s, the technique worked great – the Dow Jones Average gained about 11% annually, while the ‘dogs’ averaged annual gains of about 17%. That’s why the strategy gathered something of a cult following.

Since 1996 though, success of the strategy has been remarkably poor. In fact, since then, the Dogs strategy has only outperformed the Dow in three of those thirteen years. 2009 isn’t looking too good for the theory either.

2010’s likely Dogs of the Dow: Nevertheless, fans of the technique are getting ready for another go in 2010, perhaps expecting the odds to swing back in their favor after the strategy’s dismal decade and a half. For those so inclined to take the same questionable swing, here are your likely 2010 Dow dogs…