Investing In The "Dogs" of the Dow?
Following the wounds sustained during the Tech Bubble at the turn of the millennia, many investors never expected internet and technology stocks to soar to all-time highs again. These days, the Dow Jones Industrial Average is doing exactly that, and ironically enough, much of the success of the Dow is thanks to its technology names. In recent years, most of the tech components of the Dow had been labeled as the biggest “dogs” of the index. “Dogs” in this sense, refers to the Growth-Share (B.C.G.) business matrix where a “dog” is considered a company in a mature, slow-growing industry where the units typically "break-even" and barely generate enough cash to maintain the business's market share. If the growth is so low then why invest in them at all? The answer of course is that Dow components pay dividends – big ones!
The “Dogs of the Dow” is an investment strategy which was popularized back in 1991 by money manager, Michael B. O'Higgins. On an annual basis, O’Higgins suggested that investors create an equally-weighted portfolio containing the ten Dow components whose annual dividend is the highest percentage of the company’s current stock price. This idea is that the blue chip companies usually don’t change their dividends to reflect trading conditions. Therefore, the dividend is seen as a measure of the average worth of the company, while the stock price ends up fluctuating through the business cycle.
This means that the Dow components with a high dividend yield are near the bottom of their business cycle, and are likely to see their stock price increase faster than lower-yielding companies. Thus a portfolio that annually reinvests in high-yield companies should outperform the market. The logic here is that a high dividend yield suggests that the stock is 1) oversold, and 2) that management believes in its company's prospects and is willing to back that up by paying out a relatively high dividend. Based on this current calculation, here are the current “Dogs of the Dow” with the tech names highlighted in blue:
Clearly, these “dogs” are hardly slow-growing; not in this year, nor at the end of the year 2000. The Dow is still hitting all-time highs, even in today’s trading session, so not only is that great news for all Dow Components, this is great news for continued wealth preservation and growth in the form of dividends.
Even for those investors who missed the market on the way up, any pullback is going to be vital to enter. As of March 2012, Business Insider noted that more than 84% of mutual fund managers under-perform the market. Keep in mind that any dividends made in these funds are likely canceled out due to transaction and management fees. It makes quite a lot of sense to consider the quality of a company, as well as what dividends mean for a company’s health.
Ultimately, the technology components of the Dow still possess super growth potential. Despite market dips, the “dogs” that many feel are past their prime will remain strong with impressive dividends. Woof.