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“Dogfish Stock” Strategy: Easily Find High-Dividend Blue Chips
High-dividend stocks are often seen as havens for investors when the economy is unstable or the stock market is volatile.
However, in the US stock market, not all stocks offer stable dividends. So how to quickly find a high yield with a stable dividend and a higher quality?
This article will introduce you to a very simple defensive stock option strategy: the “Dog Stock” strategy.
What is a doggie stock strategy?
The dog stock strategy is a stock option strategy proposed by Michael B. O'Higgins, a Wall Street fund manager, in 1991.
The strategy is very simple: in the Dow Jones Industrial Average, choose 10 stocks with the highest dividend yield, buy at the beginning of the year and sell at the end of the year.
In 2022, the Dow Jones strategy performed well against the backdrop of a large decline, with the Dow Jones stock portfolio (including dividend income) up 2.2%, compared with the Dow Jones index down 8.8%, the S&P 500 and Nasdaq both reaching double digits as investors in the market A haven in times of intense volatility.
It can be seen that this strategy is suitable for those investors with a low risk preference who want stable dividend income, but also seek a certain return on capital.
What is the principle behind Dog Stock Strategy?
Dow implies that the core of the dog stock strategy is the dividend rate, which uses the dividend rate as a basis for valuation. If the higher the dividend rate, the more likely the share price is to be undervalued, the more likely it is to receive excess returns in the future.
The principle behind this is simple: the 30 constituents of the Dow Jones Index are typically hand-picked “blue chip stocks,” large companies with a long history and good financial condition with a market capitalization of over billions of dollars and stable profits. As a result, these companies often do not easily change their dividend policy, which guarantees the stability of dividends.
In comparison, its stock price may fluctuate throughout the business cycle. The stock prices of companies in the low troughs of the business cycle tend to be lower than those in the peak periods of the business cycle.
Therefore, stocks with high dividends may indicate that the company is in a business cycle low, and the share price has fallen to a relatively low level, which offers investors a potential profit opportunity.
REAL-WORLD APPLICATION OF DOG-STOCK STRATEGY
In real combat, a dog stock strategy is divided into three steps:
At the end of the year, select the 10 stocks with the highest dividend yield in the Dow Jones Industrial Average.
On the first trading day of the new year, invest the same amount of money in each of these 10 stocks. Hold this portfolio for one year.
Repeat this process every year to the ten stocks with the highest dividend yield by rebalancing the portfolio and reallocating capital to the new dividend identified in Step 1.
It is worth noting that every investment strategy carries risks and no one investment strategy can guarantee 100% success or completely avoid potential losses.
Investors should fully understand their risk tolerance, conduct comprehensive research and due diligence, and closely monitor their investments to make informed decisions that align with their financial goals.
List of Dog Stocks 2024
According to data from the Dogsofthedow.com website, the following 10 companies are listed in the list of companies based on the closing price of December 23, 2023 and the dividend rate:
How does the Dogfish stock strategy perform?
According to analyst John Slatter in an article in the Wall Street Journal, the word suggests that dog strategies are more effective at first.
Slate found that from 1973 to 1988, Dow had an annualized return of 18.4% for the Dow Jones Industrial Average, nearly twice the 10.9% annualized rate of return on the Dow Jones Industrial Average.
However, in the last 10 years, the dog-stock strategy has not been able to win the jackpot.
THE LATEST DATA FROM THE BENCHMARK POLDO-JONES INDEX SHOWS THAT FROM 2012 TO 2022, THE ANNUALIZED RETURN ON THE DOG-STOCK STRATEGY WAS 11.6%, SLIGHTLY LOWER THAN THE DOW JONES INDUSTRIAL AVERAGE 12.2% ANNUALIZED RETURN AND THE S&P 500 INDEX 12.5% ANNUALIZED RETURN.
Does this strategy still apply now?
Despite the fact that the dog strategy has performed slightly less than the Dow Jones index over the past decade, if investors just want to add some high-dividend blue chip stocks to their portfolio but aren't sure how to choose, the dog strategy is still a pretty good high-dividend stock option.
In the Futubull customer terminal, you can easily find the only stocks with the highest shares in the Futures Index.
The tool works as follows: Open the Futubull customer terminal, enter the details page of the index, click on the Share Dividend, and then rank according to the TTM, you can find the shares that are in the top 10 in the Ratio Rank.
Data source: Futubull. Data up to 1 September 2023.
To summarize
Dow refers to the Dogs' strategy of picking the 10 stocks with the highest dividend yield from the Dow Jones index constituents, buying them at the beginning of the year and then selling them at the end of the year.
At the heart of this strategy is the dividend rate. A higher dividend rate means that the share price may be undervalued, giving you the opportunity for additional returns.
Despite the fact that the dog strategy has performed slightly less than the Dow Jones index over the past decade, if investors just want to add some high-dividend blue chip stocks to their portfolio but aren't sure how to choose, the dog strategy is still a good high-dividend option.
