Dogs of the Dow

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Dogs of the Dow is a stocks investment strategy . Its aim is to achieve better performance than the overall market, which is represented by an index , by selecting stocks according to the level of dividend yield .

designation

The name Dogs of the Dow is actually misleading. The name of the strategy comes from the US colloquial language. There the term dog denotes an inferior thing. On the stock exchange, the term dog is therefore used for stocks with a poor price development in the past. According to the Dogs of the Dow investment strategy, stocks with a poor price development should not be bought, but those with a high dividend yield . The term is only understandable through the following theoretical and unrealistic consideration: If one unrealistically regards the dividend per share as fixed, the dividend yield increases when the share falls - conversely, the dividend yield decreases when the share price rises.

Despite this inaccuracy in the derivation of the term, the term Dogs of the Dow has clearly established itself in recent decades as the name for the stocks with the highest dividends within the Dow Jones . Based on the American expression, the stocks with the highest dividend within the DAX are sometimes referred to as Dogs of the DAX and the stocks with the highest dividend within the EuroStoxx 50 are sometimes referred to as Dogs of the Eurostoxx 50 .

method

On the first trading day of the year (reference date), the investor buys the 10 stocks that have the highest dividend yield from the stocks contained in an index (30 stocks for the Dow Jones and DAX, 50 stocks for the EuroStoxx ). The purchased shares are held for a year until the next reporting date without the investor reacting in any way to events on the stock exchange. The stock will be reallocated on the next key date. Any stocks that are no longer in the top 10 with the highest dividend yield will be sold. The proceeds from the sale are used to buy the shares that have recently moved up to the group of the 10 highest dividend shares. The reallocation is repeated every year on the reference date.

success

In the long term, the strategy has usually been able to achieve better results in the past than with an investment that completely replicated the respective overall market or index. If one considers longer investment horizons (e.g. 20 years), an outperformance of the strategy compared to the index can be demonstrated for almost all time periods and underlying indices. However, this fundamentally positive balance should not be viewed as a guarantee of success.

First, the strategy aims only to outperform the underlying stock index. In other words, if a portfolio built up according to the Dogs of the Dow strategy loses less than the overall market, this negative result for the investor is rated as a success of the strategy. The Dogs of the Dow achieved a performance of −1.5% in 2018, while the entire Dow Jones performed significantly worse at −5.6%.

Second, the strategy has only been able to show its superiority over the indices if it has been used for many years. With shorter investment horizons (e.g. 2 years) there are often phases in which the stocks selected according to the dividend yield developed worse than the overall market. This was the case several times between 1993 and 2008 in particular.

Thirdly, the successes in long-term investments are based primarily on the significant outperformance of the strategy in the 1970s and 1980s. In the 1990s and the years from 2000 onwards, the outperformance was much lower. In the ten years from 2002 to 2012, a Dogs of the Dow portfolio performed only slightly better than the Dow Jones Index. In the individual years, the strategy achieved the following outperformance or underperformance compared to the Dow Jones (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 presented above, there are now several variants. For example, the Low Five variant provides that out of the 10 stocks with the highest dividend only the 5 cheapest stocks are bought. Another variation is the restriction that only those of the 10 dividend stars should be bought who made a profit in the past financial year, since dividend payments reduce the substance of the company in the event of a loss.

distribution

There are several equity funds and exchange-traded funds (ETF) that select stocks according to this strategy or a modification thereof. In 2005, Deutsche Börse created its own share index, the DivDAX , which contains the 15 highest dividend of the 30 DAX stocks. In addition, there are also investment certificates based on the selection of stocks according to the level of the dividend yield.

criticism

The Dogs of the Dow investment strategy has only been able to empirically demonstrate its advantages over longer investment periods . But there is no justification why the strategy has worked in the past. As long as this causal relationship has not been found, the question of whether the strategy can also be expected to outperform in the future cannot be answered seriously.

With regard to the causal relationship between dividend yield and investment performance, the main point was that managers of stock corporations who regularly pay high dividends are disciplined by dividend payments. Since the profits from previous years flow out of the company through the dividend payment, the management cannot rest on the successes of the past, but must always ensure new profits. This leads to continuous corporate success and thus also to rising share prices.

Whether this argument is correct is questionable, however, since a reverse causal relationship can be constructed: All stock corporations that pay a high dividend are withdrawn from equity with every distribution , which weakens the company's substance and increases its vulnerability in crises.

literature

  • Michael O'Higgins, John Downes: Beating the Dow . Collins Publishing, New York 2000, ISBN 0-06-662047-3 .
  • Bet on better times with 10 payout stars , p. 36 f. in: Börse-Online , No. 3, 2009, ISSN  0934-8441 .
  • Got to the dog , p. 20 f. in: Börse-Online , No. 2, 2013, ISSN  0934-8441 .

Web links

Individual evidence

  1. Dividend Strategy Dogs-of-the-Dow 2018. Accessed February 20, 2019 .
  2. "Dogs of the Dow": Dividend strategy with a bite. maxblue.de, accessed on February 20, 2019 .
  3. boerse.ARD.de: Gallery: Dogs of the Dax 2017. Accessed on February 20, 2019 .
  4. FOCUS Online: Strategy gold donkey. Retrieved February 20, 2019 .
  5. ^ The simple 'Dogs of the Dow' strategy topped the market for a fourth straight year. Retrieved February 20, 2019 .
  6. The Dogs of the Dow 2019: 10 Dividend Stocks to Watch. Retrieved February 20, 2019 .