Dogs of the Dow

In late December 2005, I decided to change a portion of my investment portfolio to use a strategy known as the “Dogs of the Dow”.  This is a simplistic stock picking strategy based on selecting the ten highest dividend stocks in the Dow, investing an equal amount in each of them, and then holding them for a year.  At the end of the year, you repeat the process….selling your stocks and reinvesting equally in the top dividend yielding stocks.  I opted for a slight variation on the theme, buying an equal amount of five of the ten Dogs with the lowest stock price (also known as The Small Dogs of the Dow).  The intent is to try and outperform the Dow, which this strategy has consistently done for years, without having to spend a lot of time researching and moving positions around.  So, in late December I bought equal shares of GM, Verizon, AT&T, Merck and Pfizer (aka, the small dogs).  Due to my skiddishness with GM’s position in Feb 06, I sold and closed those positions out (which turned out to be a bad idea as you will see below!).  I also cashed in my Pfizer stocks and reinvested that money elsewhere.  Nonetheless, here is the Year-to-Date performance of the 5 Small Dogs of the Dow for 2006:

• General Motors (GM) = +51%
• AT&T (T) = +25.1%
• Verizon (VZ) = +15.2%
• Merck (MRK) = +27.1%
• Pfizer (PFE) = +16.8%

This equates to an average +27% on the year!  By comparison, the Dow Jones Industrial Average is up just 5.3% year-to-date.  Since I dumped GM and Pfizer, my average gain year-to-date on this portion of my portfolio is +22.5%.  (Note that these gains are pre-dividend, pre-tax, pre-commission). 

In my other investments, Microsoft is +3.8%, Sirius is -38.7% (hoping for a comeback here!), and my various Thrift Savings Plan investments (money market equivalents) average out at +2.9%.  Fortunately, I sold out of XM Satelllite Radio Holdings before they dropped from $37/share to $10/share!

Based on my limited experience with the Small Dogs of the Dow stock picking strategy, I can say that the strategy is working quite well so far this year!  I only wish I hadn’t gotten gun shy about the GM stock!