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Dogs of the Dow

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Most try to find undervalued/overlooked investments or try to find investments ... Money Sense article 'These Dogs Can Bite' Investing in the Market Index ... – PowerPoint PPT presentation

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Title: 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
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