Dogs of the Dow

1
Dogs of the Dow

• Investment Strategies

2
Investment Strategies

• There are a host of different strategies used by
  investors to try to beat the market
• Most try to find undervalued/overlooked
  investments or try to find investments that have
  momentum in some direction (ie. steadily
  increasing prices and investor interest).
• Examples include
• Dow Theory
• Dollar cost averaging, and
• Dogs of the Dow
• .although there are many, many others.

3
Dollar Cost Averaging

• DCA is more a savings strategy than an investing
  strategybecause investors of limited means, set
  aside a regular amount of money each pay period.
• DCA has been proven to be a good savings strategy
  but a poor investment strategy. As an
  investment strategy it is predicated on the
  assumption that the value of the investment will
  decline sometime over the investment periodin
  other words, it is an investment strategy with
  bearish intent.
• I have a separate slide set on DCA averaging that
  you may wish to see.

4
Dogs of the Dow

• Invented by stockbroker Michael OHiggins.
• Premise
• Blue-chip stocks are too big to fail.
• How It Works
• If you can buy poor performing stocks that are
  temporarily cheap, you can benefit from their
  health cash dividends and maybe even cash in on
  some capital gains as their share price recovers.
• Blue-chip members of the key stock market
  indicator series such as the Dow Jones Industrial
  Average or the SP TSX 60, are the target of this
  investment strategy. They are closely followed
  by analysts and institutional money managerswhen
  they are in favour, they attract a lot of
  attention and share price appreciation can be
  very strongwhen they fall out of favour, they
  can become very cheap.

5
Dogs of the Dow Using the Strategy in the U.S.

• Invented by stockbroker Michael OHiggins.
• Premise
• Blue-chip stocks are too big to fail.
• How Do You Do This?
• Pick the 10 stocks in the Dow Jones Industrial
  Average with the highest dividend yields.
• In most cases, these stocks are paying high
  yields because theyre perceived as slow-growing
  or troubled firms dogs!
• You hold them a year, collect their cash
  dividends, then replace them with a new pack of
  dogs.
• In a good year, many of these large U.S. stocks
  not only wind up paying you a nice yield, but go
  up in price as growth picks up or problems fade
  (or are managed) away.

6
Dogs of the Dow Using the Strategy in Canada

• Invented by stockbroker Michael OHiggins.
• Premise
• Blue-chip stocks are too big to fail.
• How Do You Do This?
• Pick the 10 stocks in the SP/TSX 60 index with
  the highest dividend yields
• Give them a year to hunt before returning them to
  the pound.

7
Dogs of the Dow Historical Performance of the
Strategy

• U.S. Historical Experience
• From 1973 through 2005 the Dogs of the Dow
  produced average annual gains of 14.6 or 3.4
  better than the Dow Jones Industrial Average over
  the same time period.
• In 2005 Dogs of the Dow didnt live up to
  expectations, losing 5.1 when the Dow returned
  1.7.
• The Canadian Experience
• David Stanley, University of Guelph professor
  emeritus, tracks Canadian dogs and rebalances his
  portfolio each year on May 25.
• According to Stanley, dogs of the TSX have gained
  an average of 13.5 each year since 1987,
  exceeding the return on the market index by 3.6
  a year.
• In 2005, Canadian dogs gained 22.9 which is just
  slightly better than the TSX 60 that also
  returned over 21.

8
Dogs of the Dow Dogs of the DJIA 2006
9
Dogs of the Dow Dogs of the SP/TSX 60 - 2006
10
Words of Caution

• It is important to remember to always do your due
  diligence when selecting investments.
  Sometimes, a stock is a dog for good reasons
  and it may be on a free-fall to reorganization,
  or worse, bankruptcy.
• For example, in the U.S. GM in 2005 was the only
  company in the DJIA to lose money for investors
  (6.91 per share). GM has so much debt that
  Standard Poors have cut its debt rating to a
  single B.well into junk bond territory. GMs
  health care costs and pension obligations are
  rising relentlessly and the firm is facing tough
  competition in the auto industry, lower demand
  and out of date styling and engineering of its
  products.
• When you look at the extremely high dividend
  yield for GM, you can see how much the price must
  have fallen vis a vis the stock priceso clearly,
  the market is very pessimistic about the future
  of this firm.
• Risks also exist in the Canadian listCanadian
  Bank stocks have enjoyed very good price
  performance in 2005there may not be further room
  for improvement this year. (2006)

11
Summary

• Many investment strategies are designed to find
  under-valued securities that have the potential
  for high risk-adjusted returns once the market
  discovers that it has overlooked value.
• Never naively implement an investment
  strategyalways perform your own due diligence
  and understand the risks that you are likely to
  undertake.

12
On Line Resources

• Dogs of the Dow dot com
• Winning Investing dot com
• Fool dot com The Foolish Four
• Forbes article on Dogs of the Dow
• About Money dot com
• MSN Money article on why Dogs of the Dow no
  longer works
• Globe Investor article on Dogs of the TSX
• Money Sense article These Dogs Can Bite

13
Investing in the Market Index

• EFTs Exchange Traded Funds are one way you can
  invest in the market rather than through indexed
  mutual funds