Dogs of the Dow Revisited

Jon Chevreau said:

Not seen much about this lately. If memory serves, each year you'd pick the worst performing stocks on the Dow Jones Industrial Average and buy them because they were now yielding more than the "non-dogs." Anyone actually try this or do research on whether it worked in terms of generating high absolute returns or above-average portfolio yield?

P.S. Here's one link to kick this off:

http://www.dogsofthedow.com/

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It was a nice concept and made sense a few years ago. These days, I don't want any part of it. Just look at some of the names that populated the dog list (some of which I'm sad to say I own or did own): Citigroup, Bank of America, GE, Pfizer, General Motors...the word "dog" is appropriate for them. My head still spins from the all the dividend cuts that were made a few months ago...

Citi and GM aren't a part of of the DIJA anymore. I don't think the other companies are in fear of bankruptcy so they are exactly the stocks you want to be buying if you're following the Dogs of the Dow.

I don't believe that things are different this time. They are still cyclical. Just a very big cycle this time

Seems to work in Canada. Dave Stanley has been posting good results from the strategy in Canada for years....

NormR said:

Seems to work in Canada. Dave Stanley has been posting good results from the strategy in Canada for years....

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Agree that for the TSX, if you look beyond the yields, I see value.

http://investdb.theglobeandmail.com...00411040019020002&pi_currency=&pi_param_1=240

For the Dow, it's been a value-trap the last couple of years.

I wrote about this one the blog once. The Dogs of the Dow isn't without its set of controversies. When I looked at it from the point of view of skeptics, they found outperformance not as much as advertised and close to vanishing on a net basis (after accounting for extra expenses, turnover and taxes):

The Dogs of the Dow Don't Bark

It would be interesting to look at it again.

And of course, for Canadians there are currency considerations although these megacap U.S. stocks are almost global players that make sales in most of the major foreign currencies. There's always the new BMO ETF which is in effect the Diamonds hedged back into Canadian dollars.

The problem with these simplistic rules is that people never DO buy all the stocks listed. They choose to leave out this or that stock.

It is precisely the most risky stocks that create the oomph for the portfolio. The portfolio beats the index according to its statistical mean. But the median return is frequently lower - so picking and choosing stocks from the list will not work.

And then there is fashion. Dividends are definitely in fashion now. Can you make money by chasing trends?

And then there is the basic question "If dividends are so great why are so many untruths repeated to promote dividends"?

Here's the online version of a feature I wrote in the Saturday FP: it wasn't available online immediately. It references this thread.

http://www.financialpost.com/news-sectors/story.html?id=1721259

Thanks for the mentions Jon. The trouble with the big blue chips is that they've continued to be bargains for a long time now. Wal-Mart, Microsoft, J&J are more or less flat over 10 years. Their earnings have grown but valuations have been dropping relentlessly. I suppose they'll have their day in the sun sometime but darned if I know when.

NormR said:

Well, those stocks were very expensive 10 years ago.

From MSN.com, in 2000 ...
WMT had a P/E of 40, P/S 1.5, P/B 9.45
JNJ had a P/E 33.8, P/S 5.2, P/B 8.2
MSFT had a P/E of 53.5, P/S 19.3, P/B 10.2

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Yes, I didn't mean they were reasonably valued back in 2000. But the argument that the blue-chips are cheap is at least 3 years old now:

http://www.canadiancapitalist.com/investing-in-the-unloved/

It could turn out to be a long wait

At least they're paying you (dividends) to wait! Assuming you've hung in these three long years.

Not sure how many people view Peter Lynch's philosophy of buying what you know and understand in your daily life. I had such a moment in Walmart last night. Tucked inside Walmart was a McDonald's, and included in my meal was Coca Cola. All three are Dow stocks I happen to own. Just made me think.

http://www.twitter.com/jonchevreau

These recession has really shown that some companies we previously thought were giant bullet-proof blue-chips can fall from their place atop the pinnacle.

My view on the Dogs of the Dow are simply that they highlight Dow companies that could worth looking at. However, the fact that their share price has fallen the most over the previous year is not a reason to invest. I'm with Jon on this one, there has to be additional fundamental reasons to buy the dogs, otherwise they'll likely under perform going forward.

Jon Chevreau said:

Not sure how many people view Peter Lynch's philosophy of buying what you know and understand in your daily life.

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Unfortunately, most people seem to ignore the second part of Lynch's advice on buying what you know: knowing how to value a company. I once purchased Yahoo! because I used it everyday for searching (this was before Google ate Yahoo's breakfast, lunch and dinner), e-mail, groups etc. Actually, I even made a profit on it but looking back, I had no idea what I was doing!

CC- if you have been a Yahoo! shareholder for the last few years, one could argue the company itself does not know what they are doing...

Dogs of the Dow never made sense to me. Buy a stock just because it is on a list?
Why is it on the list? Pending dividend cut? Payout ratio too high? Does it have a long history of dividend increases? What about a recent dividend increase?
What about a recent cut?

Jon Chevreau said:

Not sure how many people view Peter Lynch's philosophy of buying what you know and understand in your daily life. I had such a moment in Walmart last night. Tucked inside Walmart was a McDonald's, and included in my meal was Coca Cola. All three are Dow stocks I happen to own. Just made me think.

http://www.twitter.com/jonchevreau

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i couldn't agree with Peter Lynch more. i would love to make a million dollars on a small-cap oil refinery in alberta, but i don't know anything about oil and i've never been to alberta. i'm investing in index funds now, but once my RRSP is maxed i will buy some stocks, but it will likely be in my field (health care and technology)