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As stocks shake off their correction over the last month, the big question most investors' minds is which names make sense to build a position in now. With quality names still taking the lead in 2013's rally, the "Dogs of the Dow" provide a pretty viable answer.
For the last two decades, the Dogs of the Dow has been one of the most widely circulated investment strategies out there, offering individual investors with simple formula to beat the market: Simply buy the
10 highest-yielding Dow stocks, rebalance once a year and hold on. So should you be buying the dogs this summer?
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When Michael O'Higgins introduced his strategy in 1991, it took the market by storm; backtesting showed that the Dogs of the Dow strategy significantly beat the broad market from the 1920s on. The justification was that the big names of the Dow don't kowtow to market conditions, so their high dividends reflect strong fundamentals trading cheaply. But the strategy got a black eye during the 1990s, when it trailed the market by a significant clip.
It shouldn't have been a huge surprise that the Dogs of the Dow failed to beat the market during the bull run of the 1990s. During the tech bubble, staid Dow names couldn't possibly move as much as the more volatile tech names that were gaining increasing weight in market indices. While some market watchers have written off the Dogs strategy as a case of
data mining bias gone awry, the fundamental argument for buying high-yielding Dow stocks negates at least part of that argument.
That's especially true in the zero-rate environment we're in now.
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My own research shows that paring down the Dogs of the Dow to a more concentrated portfolio of five stocks, rather than 10, has delivered some stellar outperformance in the last decade without ramping up the risk. So today, we'll take a closer look at
five Dogs of the Dow stocks.