Investing isn’t supposed to be easy.
Or at least, not as easy as buying the 10 highest-yielding stocks in the Dow Jones Industrial Average (Dow) on January 1 and holding them for an entire year. And then repeating.
As CNBC’s Mike Murphy said, “You can’t say, take the 10 stocks and just invest in them. It won’t work that way.” Or will it?
As it turns out, the popular strategy known as the “Dogs of the Dow” has performed remarkably well over the past two years.
Heck, in 2011, the Dogs rose 10.7%, compared to a 5.5% rise for all 30 Dow stocks. If we include dividend income, the Dogs returned 16.7% versus 8.4%. (In case you’re wondering, the S&P 500 Index only rose 2.1% last year.)
That’s pretty darn impressive considering the volatile markets we endured in 2011. It’s tempting, too, given the simplicity of the strategy. But can we really expect this outperformance to continue into 2012?
Let’s take a closer look…
A History of (Mostly) Market-Beating Returns
Money manager, Michael O’Higgins, deserves credit for popularizing the Dogs of the Dow strategy in his bestselling book, Beating the Dow. And famed Wharton Professor, Jeremy Siegel, added to the enthusiasm when he featured the strategy in his book, Stocks for the Long Run.
Based purely on the numbers, I can’t blame investors for latching on to this simple strategy.
- From 1928 to 2001, the Dogs returned an average of 12.9% per year, outpacing the Dow by 1.5% and the S&P 500 by 2.2% each year.
- From 1957 to 2003, the Dogs returned an average of 14.3% annually, compared to 11% for the Dow.
- From 1973 to 1996, the Dogs returned an average of 20.3% annually, whereas the Dow averaged returns of 15.8%.
- The Dogs outperformed the Dow and the S&P 500 in every decade except 1930s and 1990s.
If we examine the most recent history, however, the performance is less than dependable. For the last decade, this simple strategy hasn’t been providing consistent, market-beating returns.
On a year-by-year basis, the Dogs outperformed in 2000, 2001, 2002, 2006, 2010 and 2011. They traded in lockstep with the Dow in 2003. And they underperformed in 2004, 2005, 2007, 2008 and 2009.
And on a cumulative basis, the Dogs underperformed the Dow from 2001 to 2010, according to Bespoke Investment Group.
Bottom line: Forget about the last two years of outperformance for the Dogs of the Dow. We shouldn’t blindly buy into this simple strategy – or any similar one, for that matter. Even the strategy’s originator, O’Higgins, isn’t a blind follower. “At times I’ve used it and at times I haven’t. I’m not married to it,” he says.
If we’re going to embrace the strategy in 2012, we need to do some more homework first. And tomorrow we’ll do just that. I’m going to evaluate the 10 stocks in the Dogs of the Dow based on multiple metrics, not simply the dividend yield. So stay tuned.
Ahead of the tape,