The Dogs of the Dow is an investment plan started by Michael B. O'Higgins, in 1991 which states that an investor annually selects for investment the ten Dow Jones Average(10DJA) stocks whose highest dividend is the fraction of its price yield at the beginning of the year. The portfolio should be maintained at the beginning of each year to include the 10 highest yielding stocks.
The “Dogs of the Dow” is a very famous investing technique. This technique takes all of the researches, guesswork and strategies out of investing. In fact, your total time is an hour per year.
People who proposed the Dogs of the Dow strategy argue that stock market do not change their dividend to reflect trading conditions and hence, the dividend is a measure of the average output of the company. This means that companies with high dividend according to the price, increases the stock price faster than the companies with low yield. Under this strategy, an investor annually reinvesting in high-yield companies should out-perform the overall market.
The logic behind this is that a high dividend yield suggests both that the stock is oversold and that management believes in its company's prospects and is willing to pay a relatively high dividend. Investors are thereby hoping to benefit from both the average stock price profits as well as a relatively high quarterly dividend. Several assumptions are made in this plan. The first assumption is that the dividend price tells about the company size not the business model of the company. The second is that companies have a natural cycle in which good performances are judged relatively to the bad ones.
If you look at Dow stocks on 1st of January, then the high yielding stocks did much better than average before 1991 than they did after 1991.
