DOW DIVIDEND THEORY

This theory suggests that you buy the 10 Dow stocks that have the highest dividend yield. The reason that has happened is that the stock price has been beaten down and, should prices rebound on supposedly good stock, substantial gains may be had. Has it worked? Yes. Between 1985 and 1995, the returns were 18.3% versus 16.36% for the Dow overall. The return of 17.7% from 1973 to 1995 handily beat overall index of 11.9%. Not too shabby. Statistical studies showing that you would have done better by just buying the top four MINUS THE LOWEST PRICED DOW STOCK. That returned 23.1%. If you had just picked the second lowest priced stock, it returned 25.4%- but that is a lot of risk owning just one stock. However, my commentary here addresses a relatively obscure article that noted that doing the same thing with International stock produced a return of 20%. Unfortunately they didn't indicate what market/stocks were used or anything else, but it certainly bears watching.

Dogs of the Dow (NY Times 2002) The strategy favors stocks within the Dow Jones industrial average that have the highest dividend yields. The yield is calculated by dividing a stock's annual dividend rate by its current price, and there is more than one way for yield to grow. If a stock's price is constant, the yield grows when its dividend rises. Far more commonly, yield grows because a stock's price declines while the dividend remains constant. High-yielding stocks tend to be out of favor, which is why they are often called "dogs."

When it gained investors' interest in the early 1990's, the strategy called for buying the 10 highest-yielding Dow stocks at the beginning of each year. The strategy had an impressive record when "Beating the Dow," by Michael B. O'Higgins, a popular book advocating the strategy, was published in 1991. From the beginning of 1973 through the end of 1990

One variation was to buy just the five lowest-priced stocks among the 10 highest-yielding Dow stocks. Another was to buy just one stock, the second-lowest- priced of the highest yielders.

in 1999, when the Dogs of the Dow strategy lagged behind the market by large margins, with the five- stock variety losing 4.5 percent, and the one- stock version losing 41.7 percent.

The article finished with "If investors want to succeed with a strategy, they have to stick to it. It is important, then, to pick a strategy with low- enough risk that you aren't tempted to abandon it in difficult times."

So I ask, how would these people have fared in 1973 and 74? Would you have felt comfortable- assuming almost any viable risk- in losing over 40% of your asset base in less than two years. Difficult times addressed above finally meant a mild recession. What if it was, again., 1973/74. Many marriages would have suffered dearly if the old man had put his funds into yet another can't lose strategy.

Harsh? Then why did the FED's effectively do a $3.5 billion bailout because Long Term Capital failed.After all, supposedly given time, it would come back. But how many consumers would have been hurt in the interim Further, was there any guarantee that LTC would come back?  

Be careful of articles written by journalists with no background.