Chapter 9: Dogs of the Dow

Chapter 9: Dogs of the Dow

Do you want to invest in the market but don't want to spend much time researching stocks or mutual funds? Consider using the Dow Dividend Strategy, otherwise known as the "Dogs of the Dow."

When a radio announcer crows, "The market was up 40 points today," he's probably referring to the Dow Jones Industrial Average. It is an index of 30 large companies that reflect America's industry. Retailers like Sears and Wal-Mart, financial companies like American Express and Citigroup, oil companies like Exxon and Chevron, tech companies like Hewlett-Packard and IBM, even Disney and McDonald's are part of the index.

The Dogs of the Dow strategy requires that you buy ten Dow stocks with the highest yield -- the ratio of the dividend that the stock pays relative to its current trading price. Typically, these ten stocks provide a high yield because their stock price has been beaten down by investors for poor company performance or a bad industry outlook, hence the name Dogs of the Dow. In theory this strategy works because it allows you to invest in a company with historically good fundamentals during a time when its stock price is relatively cheap.

The Dogs of the Dow investing strategy is simple to do and takes less than an hour every year. Best of all, it has produced good returns compared to the performance of the Standard & Poor 500 stock index, a wider measure of stock performance.

How do you set up your Dogs of the Dow investment program? It takes just five easy steps -- that's how simple this strategy is.

1. List the 30 stocks that make up the Dow Jones Industrial Average. (If you don't already know them, on Page 3 we show you where to find the list on the Web.)

2. List each stock's current price and calculate its dividend yield. For example, for a stock with a current trading price of $45 per share and an annual dividend yield of $3 (make sure it's not a quarterly dividend yield), simply divide 3 by 45. That's a yield of 7 percent. To obtain each company's dividend information, input the ticker symbol on the Market Guide Web site. (It lists the company's annual dividend under "Key Ratios & Statistics"). Repeat for all 30 stocks, and pick the ten stocks with the highest yield.

3. Invest equal amounts of money in the highest yielding ten stocks -- the "Dogs of the Dow."

4. Hold them for approximately one year. You're expecting the stocks will rebound.

5. Like the instructions on shampoo bottles -- repeat. (If stocks you buy one year aren't on the list the next, sell them. If they are, you may consider holding them a bit longer.)

See how easy that is? Now do it, go play some golf, and come back in a year to readjust your investment portfolio.

To find the list of the Dow Jones 30:

1. Go to indexes.dowjones.com.

2. Select the "Dow Jones Averages" icon.

3. Select "DJIA components."

You'll not only find the list of stocks, but you'll also have their current prices.