This Day On The Street
Continue to site
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

The Dow Dogs' Contrarian Bite

If everyone else jumped off a bridge, would you?

When it comes to investing, the answer is probably yes. But there's a perfectly good antidote to buying high and selling low, and it's most likely something your mother never told you: contrarian investing.

Contrarian investing is a simple way to benefit from investors' tendency to be most optimistic when the market is peaking and most pessimistic when the market is bottoming. In his seminal Stocks for the Long Run , Jeremy Siegel lists contrarian investing first in his section on "return-enhancing strategies," citing evidence that "contrarian strategies of increasing stock exposure when most investors are bearish and decreasing exposure when they are bullish can improve long-term returns."

Of course, contrarian investing means different things. For some, it means buying out-of-favor stocks. For others, it means running like hell from an overvalued market. Today's Financial Education column will discuss a more moderate contrarian approach: The Dow 10 strategy, also known as the Dogs of the Dow.

The strategy is simple: Buy equal amounts of the 10 highest-yielding stocks among the 30 components of the Dow Jones Industrial Average and hold them for a year. At the end of each year, rebalance the portfolio to reflect the new top-10 highest-yielding Dow components. Among the Dow 10 currently: Philip Morris (MO - Get Report), SBC Communications (SBC) and J.P. Morgan Chase (JPM - Get Report).

The Dogs of the Dow
These 10 stocks currently have the highest yields among the Dow industrials.
Stock Yield on 6/13/03
Altria (MO) 6.07%
Eastman Kodak (EK) 5.84%
General Motors (GM) 5.52%
SBC Communications (SBC) 4.46%
J.P. Morgan Chase (JPM) 3.92%
AT&T (T) 3.60%
DuPont (DD) 3.21%
Honeywell (HON) 2.69%
International Paper (IP) 2.64%
ExxonMobil (XOM) 2.64%
Source: dogsofthedow.com
*Yield as of June 13.

The strategy offers several virtues these days. First off, it has a built-in method for picking down-on-their-luck stocks. A stock's dividend yield is determined by dividing the amount of a dividend per share by the stock price -- when a stock falls, the yield rises. That's how the strategy got its name: Stocks that make up the Dow 10 tend to have been dogs over the past year, hence pushing up the yield.

In addition to the contrarian benefits, the recent dividend-tax cut makes the strategy more alluring. The average yield on the current Dow Dogs is 4.03%. In other words, if an investor put $10,000 in a Dow 10 portfolio, the stocks would pay out $403. Since the tax on dividends was pared to 15% -- barring state and local taxes, of course -- investors get to keep more of the dividend.

1 of 3

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Submit an article to us!
SYM TRADE IT LAST %CHG
GM $35.42 0.00%
JPM $63.61 0.00%
MO $50.66 0.00%
MSFT $48.66 0.00%
AAPL $128.95 0.00%

Markets

DOW 18,024.06 +183.54 1.03%
S&P 500 2,108.29 +22.78 1.09%
NASDAQ 5,005.3910 +63.9670 1.29%

Partners Compare Online Brokers

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs