The Dogs of the Dow is a popular investment strategy. It entails investing in Dow Jones Industrial Average stocks that have the 10 highest yielding dividends. The theory behind this strategy purports that blue chip companies do not change their dividend to show the trading conditions. So, the dividend should be used to calculate the average worth of the company. The stock price is regarded as fluctuating through the business cycle.
This strategy was made popular in the 1990’s by Michael O’Higgins and encouraged investors to select stocks where the dividend is the highest fraction of their price. He felt that companies that had a high yield coupled with a high dividend that was relative to the price were near the end of their business cycle and were thought to have their stock prices rise faster than the lower yielding companies.
If this were to be successful, then an investor that chose to reinvest every year in high-yield companies should be able to out-perform the entire market. The reasoning behind this is that companies with a high dividend yield has stock that has been oversold and therefore, management believes in the company and its future and is willing to back it up by paying a high dividend. Investors in these companies are then hoping that they can benefit from this speculation and profit from higher stock price gains in addition to a higher quarterly dividend.
There are a couple of assumptions that are being made, however, to support this theory. One of them is that the dividend price is a reflection of the size of the company and not the business model. The other is that the companies have a repeating cycle of good performances that are predicted by bad ones.