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This Old Investment Dog Will Still Hunt

by Chris Poindexter

Most of you know from previous columns that I attach a very low premium to conventional wisdom, mostly because so few financial situations are conventional. Markets are constantly evolving and the global business climate undergoes constant change. Investment strategies and truisms that worked 30 years ago may no longer apply, and even the small investor has to keep up. There are however viable investment strategies that border on being conventional, but might be better described as “old school.”

There are many ways to invest in equities, but they can all be somewhat crudely classified as either growth or income strategies. It’s difficult and dangerous to generalize too much, because equities can be such a diverse investment platform. Still, it’s valid to state in general terms that growth stocks are companies that are still growing into their market share, while income stocks are mature companies that return money to investors in the form of dividends. Which one you will choose will depend on where you are in the investment cycle and on your tax situation. In general, younger people tend to invest in growth and, as you get older and need a hedge to maintain a standard of living on a fixed income, your focus will shift to equities that contribute to your cash flow.

The Dogs of the Dow is one of the few systematic approaches able to consistently top overall market returns.

One of those income strategies that’s been around since Wall Street observers were making notes on clay tablets dried in the sun is called the Dogs of the Dow. Over the long haul, the Dogs of the Dow is one of the few systematic approaches able to consistently top overall market returns. It even has its own website.

In its most pure form, the Dogs of the Dow strategy involves holding a portfolio composed of equal dollar amounts of the top 10 highest-yielding stocks of the Dow Industrials. For the reasons we discussed yesterday, you should rebalance that portfolio at least once a year. If you don’t mind sharing a small margin with a fund manager, you can buy an Exchange Traded Fund (ETF) like Elements Dogs of the Dow (DOD), or a mutual fund like Hennessy Total Return Fund Investor Class (MUTF:HDOGX) that will take care of the rebalancing for you.

The advantage of holding a Dogs of the Dow ETF is, in most cases, you can set up your brokerage account to automatically reinvest the dividends, creating what I call an “investment snowball.” Investment snowballs are wonderful because they roll downhill on autopilot, and just keep getting bigger the longer you hold them.

Since 2009, the market has mostly favored a growth strategy over income. If you believe, as I do, that the markets are headed into a zone of flattening returns, then the Dogs of the Dow is like that comfortable old college sweatshirt you drag out of the closet when the weather starts to turn in the fall. Going to the Dogs is a way to hedge against a frothy market. If stock prices fall, then a dividend reinvestment strategy nets you more shares for your dividend dollars. Whether the market goes up or down, you can still sleep nights.

Obviously that explanation is simplified a bit, as a drop in share prices is usually triggered by a drop in earnings, which translates into lower dividends. Like with anything in investing, you’re playing in the margins.

There are a number of spins you can put on the Dogs of the Dow strategy. You can apply the same strategy in foreign markets with two ETFs from Alps called IDOG and EDOG. Both focus on applying the Dogs of the Dow strategy to overseas markets, with EDOG focused more on emerging markets.

As more people employ a particular strategy, the effectiveness of any systematic approach tends to diminish over time. Yet the Dogs strategy has been around forever in investing time, and has managed to hang in with investors. The Dogs of the Dow is an old dog to be sure, but it can still hunt.

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