Dogs of the Dow

Dogs of the Dow is an investment strategy for equities. Its goal, through the selection of shares by the amount of dividend yield to achieve a better performance than the overall market, which is represented by an index.

Designation

The Dogs of the Dow name is actually misleading. The name of the strategy comes from the American vernacular. There, the term dog an inferior thing. On the stock market, the term is therefore dog for stocks with poor performance in the past used. According to the Dogs of the Dow investment strategy but are not the stocks are bought with a bad performance, but those with a high dividend yield.

Nevertheless, the designation Dogs of the Dow has established itself in the U.S. stock market jargon to refer to the highest-dividend stocks in the Dow Jones index. Based on the American expression, the highest dividend stocks in the DAX in part as Dogs of the DAX and the highest dividend stocks within the Euro Stoxx 50 are called Dogs of the Euro Stoxx 50.

Method

On the first trading day of the year ( date), the investor of the information contained in an index buys shares ( the Dow Jones and the DAX, these units are 30, the Euro Stoxx 50 50 shares) 10 shares that have the highest dividend yield. The shares purchased will be held one year to the next date, but the investor reacts in some way to the stock market. The next date of the baseline is shifted. All shares that are no longer among the 10 with the highest dividend yield, are sold. With the sale proceeds to buy those shares that are newly risen to the group of the 10 highest dividend stocks. The shift is repeated every year to date.

Success

In the long term could in the past with the strategy usually provides better results than with a system that abbildete the respective overall market or index completely. Looking at longer investment horizons (eg 20 years), an outperformance of the strategy against the index can be detected for almost all periods and underlying indices. This generally positive assessment must not be regarded as a guarantee of success.

First, the strategy is designed to generate only the goal of a better performance than the underlying index. That is, a structured according to the Dogs of the Dow strategy Depot loses less than the overall market, so this negative result for the investor is seen as a success of the strategy.

Second, the strategy in the past has been able to show their superiority over the indices only for long-term use. For shorter investment horizons (eg 2 years), there are often phases in which the selected after the dividend yield stocks underperformed the overall market. This was particularly 1993-2008 several times the case.

Third, based on the success of long-term investment, especially in the significant outperformance of the strategy in the 1970s and 1980s. In the 1990s and the years after 2000, the outperformance was considerably lower. In the ten years from 2002 to 2012, a Dogs of the Dow Depot net developed only slightly better than the Dow Jones index. In each year of the strategy against the Dow Jones following outperformance or underperformance achieved (expressed in percentage points): 2002: 6.1 % / 2003: -0.4 % / 2004: -0.9 % / 2005: - 6.8% / 2006: 11.2 % / 2007: -7.9 % / 2008: -7.8 % / 2009: -5.8 % / 2010: 6.4 % / 2011: 7, 9% / 2012: -0.0 %.

Variants

Derived from the basic idea of Dogs of the Dow shown above, there are now several variants. So, for example, sees the Description Low Five before, only the 5 cheapest to buy from the 10 highest dividend stocks. Another variation is the restriction that only those to be purchased from the 10 dividend stars who have made ​​profits in the last financial year as a dividend payment in case of loss diminishes the substance of the company.

Dissemination

There are several equity funds and exchange - traded funds (ETF ) that select for this strategy or a variation thereof shares. The German stock market has its own index created in 2005, the DivDAX, which contains only the 15 highest dividend DAX stocks. Furthermore, there are also investment certificates that are based on stock selection on the level of dividend yield.

Criticism

The investment strategy Dogs of the dow could prove their favorability over longer investment periods only empirically. But there is no explanation of why the strategy has in the past led to success. As long as this causal relationship is not found, the question is whether in the future is expected to outperform the strategy, do not answer. In the years since 2005 there has been as many studies show numerous signs that the dividend strategy nowadays by no means guarantees a better performance than the overall market. Thus, for example the DivDax since 2008 a significant underperformance against the Dax.

With regard to the causal relationship between dividend yield and investment performance was led mainly that managers of public companies that pay a high dividend regularly, be disciplined by the dividend payment. Since the profit of previous years abfließe by the dividend payment from the company, the management can not rest on past successes, but must always provide new revenue. This leads to a continuous success of the company and thus to rising stock prices.

Whether this argument is true, but is questionable as a reverse causal relationship can be constructed: all public companies that pay a high dividend, at each dividend equity is removed, which weakens the substance of the enterprise and increases its susceptibility to crises. In addition, the outflow of capital requires the increased shots of borrowing, which in turn leads to an increased interest burden and thus to lower the company's success.