|The Dogs of the Dow |
These 10 stocks currently have the highest yields among the Dow industrials.
|Stock Yield||on 6/13/03|
|Eastman Kodak (EK)||5.84%|
|General Motors (GM)||5.52%|
|SBC Communications (SBC)||4.46%|
|J.P. Morgan Chase (JPM)||3.92%|
|International Paper (IP)||2.64%|
|Source: dogsofthedow.com |
*Yield as of June 13.
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), SBC Communications ( SBC) and J.P. Morgan Chase ( JPM).
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.
The strongest selling point for the Dogs of the Dow strategy: It has worked. In his excellent book
How to Retire Rich, Bear Stearns Asset Management's James O'Shaughnessy explained that a $10,000 investment in the Dow Dogs in 1952 would be worth $6.6 million by 1996, compared with $1.7 million for the same investment in the S&P 500. Beating the Dow helped popularize the Dogs of the Dow strategy. However, O'Higgins doesn't recommend the strategy now because he believes the market is entirely overvalued and that the economy is headed for a depression. We'll discuss more dire contrarian strategies that O'Higgins and others espouse -- think Newmont Mining ( NEM), for starters -- in future Financial Education columns.
The dividend yield on the Dow industrials has trickled higher in recent years, but it still remains low by historical standards. The current average yield of the Dow industrials is 2.35%, compared with a median yield of 4.54% from 1871-2001. This is partly to blame on new additions to the Dow such as Microsoft ( MSFT) and Intel ( INTC) that don't offer much in the way of dividends -- if anything. But it has more to do with the fact that dividends have been declining in popularity for decades, reaching a nadir in the late 1990s. Investing based on dividend yields, while better than in recent years, doesn't offer as much bang for the buck as it used to. Lastly, investors aren't getting a ton of diversification by buying these 10 stocks, most of which fall under the large-cap value category. If you don't have a ton of money to spread your assets around, the Dogs might not work for you.
Dogs of the Dow Web site.