Dogs of the Dow dividend investment strategy : undervalued stocks which beat the market.

One of the more known and easier dividend investing strategies is the Dogs of the Dow dividend investment strategy. The dogs of the Dow dividend investment strategy uses dividends to find out of favor and undervalued stocks that can beat the market. The strategy focuses on the highest yielding stocks of the oldest US stock market index, the Dow Jones Industrial Average (DJIA).

The idea behind the Dogs of the Dow dividend investment strategy is that blue chip companies do not adjust their dividends to the overall market conditions. This would make the company’s dividend a measure of the average worth of the company. With this knowledge in hand it would mean that companies with a high dividend yield would be undervalued compared to the low dividend yield companies in the Dow Jones Industrial Average (DJIA), therefore it’s more likely to see faster stock price increases of the high dividend yield companies.

The Dogs of the Dow dividend investment strategy consists of the following steps and criteria:

1.  List the yields of the Dow Jones Industrial Average.

2.  Buy the ten highest yielding stocks in the Dow in equal dollar amounts.

3.  Hold your shares for a year.

4.  After a year: repeat steps 1 trough 3. Sell any shares  which do not follow the criteria in steps 1 trough 3 and buy shares that do follow the criteria in step 1 trough 3.

Research has shown that the Dogs of the Dow dividend investment strategy portfolio has annually outperformed the Dow Jones Industrial Average, based on data from 1973 through 1998. During that period the portfolio with the ten Dogs earned three times as much as the Dow Jones Industrial Average (DJIA). However more recent data shows a return over the last 20 years of 10,8% against 9,6% for the S&P 500 both without dividends.