Question: I read that December or January is a good time to look into the Dogs of the Dow. But what are they?

John

Answer:

Dear John,

The Dogs of the Dow is an interesting and quite popular stock buying strategy -- it may or may not be right for you. Here are the facts...

The strategy focuses on the 10 highest yielding stocks of the 30 stocks that make up the Dow Jones Industrial Average.

At the beginning of each year, you buy equal dollar amounts of the 10-highest yielding Dow stocks and hold them exactly one year. Then, you readjust the portfolio at the end of the year so you start the new year holding the new 10 highest yielding stocks.

You wind up buying companies in the Dow that have the lowest P/E ratios and the highest dividends -- so they are cheap relative to their peers. The theory is that you are buying quality companies when they are temporarily out of favor and that you will generally be selling them when they've gone up in price. In the meantime, you've collected the dividends.

Advantages...

• It's a pretty easy strategy to follow. It doesn't require a major in calculus to figure out.
  
  
• There are very few brokerage commissions involved, in that you buy and hold for the year.
  
  
• You own stocks that have decent yields.
  
  
• You own stocks that are considered relatively safe -- the 30 stocks in the Dow are solid leaders in their fields.

$Tip: You might want to use this strategy with just 5 stocks.

Disadvantages

• If these are the only stocks you own, you will not be very well diversified.
• All stocks, even those in the Dow, are subject to the risk of dropping in price.

More Information

The dogsofthedow.com website, which is devoted to tracking information about the technique, reports that if you had followed this strategy since 1973, you would have had an average annual return of over 17%. However, I have not checked these figures nor am I endorsing the site. I am merely suggesting that you take a look at it for background information, keeping in mind that it is commercially oriented.