The increasingly popular strategy of buying the 10 highest-yielding stocks in the venerable Dow Jones industrial average is surging in popularity.
The strategy - known as "Dogs of the Dow," because these stocks tend to have high yields when their prices are depressed - has produced robust annualized gains of 18 percent over the past 25 years.Investors can buy the individual stocks or purchase unit investment trusts - prepackaged portfolios sold by many brokerage companies. Or, you can buy mutual funds that mimic part of the strategy.
Ironically, in three of the past four years, an investor would have done better by investing in all 30 Dow stocks than by focusing on the 10 dividend leaders. But defenders of the dogma say it is a conservative strategy, because of its focus on yield, and one that will rarely excel in blistering markets.
"When you're in a market that goes up relentlessly every day, it's hard for a stock like GM to keep up," says James O'Shaughnessy, head of a company that runs a mutual fund that invests partly in the dogs.
He and other fans argue that the strategy will really shine in the next bear mar-ket.
Indeed, the strategy shone during the 1973-74 bear mar-ket, with the dogs losing just over 1 percent, while the Dow fell 33 percent.
If you want to implement the strategy yourself, you should invest at least $10,000, preferably more, to avoid being eaten up by commissions. Simply buy the 10 highest yielding stocks at the start of each year. Some stocks will need to be replaced each January.
To practice the system rigorously, rebalance your holdings occasionally, so that you own roughly equal dollar amounts of each stock.
Unit investment trusts have relatively stiff sales charges, but minimum investments are as low as $250. Charles Schwab (800-435-4000) offers a somewhat lower cost unit investment trust.
The law won't allow a pure Dogs of the Dow mutual fund, because it's not diversified enough.
Hennessy Balanced (800-966-4354) invests half of its assets in the Dow's 10 highest yielders and the rest in one-year Treasuries.
O'Shaughnessy Dogs of the Market (800-797-0773) invests half of its assets in the dogs and the rest in 20 high-yielding stocks from the Standard and Poor's industrial index.
Payden & Rygel Growth & Income (800-572-9336) places half of its assets in the dogs and the other half in the S&P 500-stock index.