Advertisement

Does a “Dogs” investment strategy make sense?

Buying the market’s “Dogs” – top-ten high yielders – every year is a popular strategy, but does it make sense?

911_MW_P15_Strategy
The Dogs strategy leaves you with stocks that are too similar

One of the most straightforward and widely known investment strategies is the "Dogs of the Dow", based on a book published in 1990 called Beating the Dow by Michael O' Higgins. After the market closes on the last day of the year, buy equal dollar amounts of the Dow Jones index's ten highest-yielding companies. Hold on to them for a year, and then repeat the process.

Advertisement - Article continues below

The strategy is a form of value investing, with a high dividend yield reflecting a poorly performing, unpopular stock in the bargain basement. The idea is to profit from the high yield and the capital gains as the stocks bounce back. Money Observer has been doing a UK version, the (ten) Dogs of the FTSE 100, since the turn of the century.

Over the past 17 years the Dogs portfolio has produced an annual average total return of 13.7%, compared with the FTSE 100's 6.1%. As for the original Dogs, backtesting the data revealed that in the 26 years between 1973 and 1998 the strategy outstripped the index by a factor of three. But since then it has been much less impressive, achieving a total yearly return of 8.6% between 2000 and 2016, compared with the Dow's 6.9%.

Advertisement
Advertisement - Article continues below

The problem? For starters, the annual portfolio rejig would incur substantial trading costs; another technical objection is that with equity buybacks becoming an increasingly popular way for companies to return cash to shareholders (especially in the US), the dividend yield isn't quite as representative as it was when it comes to pinpointing beaten-down and unloved shares. Remember too that a high dividend yield can be a sign of trouble as well as of good value. In 2017, for instance, shares in one of the dogs, Capita, sank by 40% when the dividend was cancelled amid a profit warning. The outsourcer's travails ensured that the Dogs portfolio produced a total return of just 8% in 2017, and failed to beat the index for the fifth time on record.

This brings us to the main problem dogging the Dogs: if just one stock can make the difference between under- and outperformance, it reflects the fact that a portfolio of ten companies is too narrow to be considered diversified. It will tend to be skewed towards a handful of sectors, because trouble sometimes affects entire industries, or investors marking down a stock will be inclined to punish its peers too. The Dogs Portfolio of 2014 gave investors a heavy weighting in technology (30%) and healthcare (20%). Similarly, half the last FTSE dogs comprises utilities (SSE, Centric, and National Grid) with 20% in oil (BP and Shell). A larger portfolio with a wide spread of industries is a better long-term bet: seek out an income fund rather than going to the Dogs.

Advertisement
Advertisement

Recommended

Reasons for investors to be cheerful
Investment strategy

Reasons for investors to be cheerful

Markets are betting on a V-shaped recovery – and recent data suggests that they may be right.
3 Aug 2020
Great frauds in history: Joe Nacchio’s insider trading
People

Great frauds in history: Joe Nacchio’s insider trading

Joe Nacchio, CEO of telecoms firm Qwest, was convicted of 19 counts of insider trading in 2007 and served four years in prison.
30 Jul 2020
What would the greatest mathematician of the Middle Ages say about gold today?
Sponsored

What would the greatest mathematician of the Middle Ages say about gold today?

Italian mathematician Fibonacci is most famous for a curious sequence of numbers. Continuing his series on technical analysis, Dominic Frisby explains…
27 Jul 2020
Gold could set new records, even from here – here’s how to invest
Gold

Gold could set new records, even from here – here’s how to invest

The gold price has soared in recent days, and it could go higher yet, says John Stepek. Either way, you should hold some gold in your portfolio.
27 Jul 2020

Most Popular

Can the recent rally in sterling continue?
Sponsored

Can the recent rally in sterling continue?

A "double top"  – a very recognisable pattern – is forming in in the US dollar. Dominic Frisby explains what it is, and what it could tell us about st…
3 Aug 2020
UK banks have had a shocking week – so it’s probably a good time to buy
UK stockmarkets

UK banks have had a shocking week – so it’s probably a good time to buy

Lloyds Bank reported a £676m loss this week. And, with all of the UK's high street banks having a terrible time of things, bank stocks are detested ri…
31 Jul 2020
Gold bugs' dreams are coming true – but we could still see a V-shaped recovery
Gold

Gold bugs' dreams are coming true – but we could still see a V-shaped recovery

John and Merryn talk about how it's perfectly reasonable to expect a V-shaped recovery and to continue holding gold as well. Plus, inflation, staycati…
30 Jul 2020