Beginning Traders

Dogs of the Dow

What is an old favorite of the less active traders out there? It is the Dogs of the Dow trade. In this trade you purchase the 10 highest yielding stocks in the DJIA on January 1st of each year. As the chart below shows some years it performs well against the market other years it does not.

Investment 2004 2005 2006 2007 2008
Dogs of the Dow 4.8% -5.1% 30.3% 2.2% -38.8%
Small Dogs of the Dow 13.2% -0.4% 42.0% 4.2% -49.1%
DJIA 5.3% 1.7% 19.1% 8.9% -31.9%
S&P 500 10.9% 4.9% 15.8% 5.5% -37.0%
Dogs Variance from DJIA -0.5% -6.8% 11.2% -6.7% -1.8%
Small Dogs Variance from DJIA 7.9% -2.1% 22.9% -4.7% -17.2%

What is the Small Dogs of the Dow? It is a slightly different take on Dogs of the Dow, in it an investor selects the Dogs of the Dow just like normal except he then invests only in the 5 Dogs with the lowest price. Some think that the Small Dogs perform better than the regular Dogs.

How would I improve upon the Dog trades? Well in either trade I would limit my losses in any one stock to 10%. Moving that money either into one of the stronger Dogs or putting it in a safe investment until that losing stock either dropped another 15%, in essence buying on a 25% dip from original entry, or when it appeared to form a stong base. This complicates the trade a bit but having a hard exit is one of the most important rules of trading. Limit losses!

These are seemingly simple trades but beware they have risks just like any other investment. Some years they perform well against the overall market and some years they lag. We do not make investment recommendations here at Beginning Trader we just provide information.

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