dogs of the dow returns

Hey I’m Jimmy in this video. I’m going to work for a popular
strategy called the dogs of the dog. So this strategy first came about in a book called Beating the Dow back in 1991 I believe there’s a link in the description below to
the updated version if you’re interested. Now our question for this video is what is the dogs of the Dow and does this strategy work. OK. So what is the dogs of the Dow
strategy. It’s actually quite simple. So what we do is we buy the 10 highest dividend yielding stocks in the Dow Jones industrial average. Now there are only 30 stocks in all of the Dow. So essentially we’re gonna be doing
is going to be buying the top third of the highest dividend yielding stocks. And here’s the theory behind the
strategy. So the Dow Jones Industrial Average
consists of many of the world’s largest
companies. You may have seen some of the videos
that we’ve done on this channel called the Dow our Dow 30 analysis where we’re
analyzing all 30 stocks in the Dow Jones
Industrial Average. And for me it’s been a very
interesting exercise because I get to analyze many different companies in many
different industries. But one thing that all these
companies have in common is that they all pay a dividend. Now they don’t all pay great
dividends but they all pay a dividend visa as an example has a dividend yield of
just it’s about one half of 1 percent while a company like IBM on the
other hand has a dividend yiled of over 4
percent. Now it’s important remember how a
dividend yield is calculated. So it’s simply the dividend you get
over the past year. Divide that by the current
price and what you end up with is a dividend yield. So imagine that you had a stock that paid out what it cost ten dollars to buy the shares and paid her a dollar in dividends. Well you take the dollar you divide
it by 10 in over the 10 percent dividend. Now this is why it’s important for
this strategy because that ten dollars that you paid is crucial to the whole thing. So what happens if our ten dollar
stock falls down to five dollars per
share. Sure I’m being a bit extreme you’ve
dropped by 50 percent but the concept remains the same. If it fails if it fell down from ten
dollars to five dollars and since the dividends paid over
the last year doesn’t change. Well now it’s a dollar divided by
five. Therefore we have a 20 percent
dividend yield. So that’s how you end up with when you screen for the highest companies in the Dow the ones that
have the highest yields what you might
end up with is the companies that have
fallen the most. Hence the term dogs of the Dow. The theory is just because the price is fallen well these companies are still blue chip companies and are probably safe now. We’re not going to say they’re
always safe and we’ll see some examples in a
second. But that’s the whole strategy. Basically you buy the 10 highest yielding companies assuming you’re buying them cheap because the
price fell. That’s why the yield went up and that goes into our portfolio. We buy them once a year and we equal weight them every year. So does it work. Well I actually went ahead and ran a back test on the dogs of the Dow strategy going all the
way back to the year 2000 and this is what the portfolio would have looked like had we
followed the rules according to the book that was written about this. It’s called beating the Dow and sure this looks pretty good. But the book claims that this strategy is designed to beat the actual Dow Jones Industrial
Average. So this chart this is the strategy versus the Dow Jones Industrial Average. And as you can see it looks like the
dogs of the Dow strategy did in fact beat the Dow. But let’s look a bit closer at some
of the individual years and then we’ll look for some
holes that the strategy may have. So this is the annual returns for the dogs of the Dow and for the Dow Jones index going back to 2000 and then this is how they did
relative to each other. Now these are all total return
numbers. So for both the dogs of the Dow and for the Dow Jones index itself we assume that all dividends get reinvested into the portfolio. I also assume that they were equal
weighted at the start of each year because
that’s what the book said. So during this time period but we had 19 19 different time periods. And in all those years the dogs of
the Dow lost to the Dow Jones index five times. Now this means that the dogs of the
Dow were about to beat the Dow Jones Industrial
Average about 74 percent of the time. And frankly this fascinated me is it really that simple. So I thought to myself well maybe it’s only working because it’s being
compared to the Dow Jones industrial average and not something like the S&P 500 after all the Dow is a price weighted index and the S&P 500 is a market cap
weighted index plus the S&P 500 as so many more companies. Well this is what the chart looks
like for the dogs of the Dow versus the S&P 500. And it turns out that this wasn’t
even close. So I thought that it was really
interesting. But now let’s see if we can find
some holes in the individual strategy every strategy has them. So I was curious what this one was. So if we switch back to the annual
performance well we could see that this time
period jumps out at me. In fact that could easily make a
case that this five year time period we could analyze
that but 2006 was such a good year that a price makes sense to focus on the three year time
period. Now to down even more. 2009 was the worst of all the years. So I assure you I could jump in
there and look at that specific year to see what we could identify. Okay so these are the holdings
during the 2009 holding period. And this actually brings us to the
key weakness of this strategy. In my opinion 10 stocks really isn’t enough to fully diversify a portfolio. Studies have shown that somewhere
between 20 and 40 companies gives enough of the benefits of
diversification. So that’s a risk and I actually think that it’s the
biggest risk. Since less companies mean. It means that you’re more
concentrated in each company that you own and your less you’re less likely to
be spread out amongst more and more sectors. OK so what happened in 2009. So we know that’s when the Great
Recession was going on and we know the banks were getting
killed at the time and Citigroup was down more than 50 percent in that year. And that really hurt hurt the
portfolio because once again it’s a large part of the
portfolio. But the biggest issue in this year was General Motors General Motors filed for bankruptcy in 2009 and the stock was down more than 85
percent that year. This is a danger of
having such big weightings on every holding but the same can be true on the
upside. 2003 was the best year for the dogs of the Dow. They posted up more than a 40
percent gain Beating the Dow Jones index by more
than 12 percent. And in that year Caterpillar was up more than 80 percent. And since that was such a big piece of the whole portfolio the entire portfolio did very well. So I think that that’s the biggest
risk. And also one of the biggest benefits
I think that you’re likely to get increased
volatility with this type of strategy. But overall history has proven it seems to be working. But what do you think. Do you like the dogs of the Dow
portfolio. Actually got this idea for a video from a comment on another video that
I had done and that subscriber had told me that they had been
implementing the dogs of the Dow strategy on their own portfolio for the past
few years. They said they’ve had a quite a lot
of success with it so I can see how they’d have a ton of success
look what the returns have been like over the past five
years or so. So congrats to them on that. That’s awesome. So to everyone else. Have you ever tried this strategy. Is this the type of thing you would
implement in your portfolio. Are there any other strategies that
you’ve heard about or that you’ve tried or you want to try. Let me know what you think in the
comments below. I’d be curious to make a video on other types of strategies that
have histories that has a history of
being successful. So if you haven’t done so already at
the subscribe button. Thank you for sticking with me all
the way into the video and I’ll see in the next video.

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