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Dogs Of The Dow: Mid-Season Review

07/17/06 02:54:45 PM PST
by John Devcic

How are the Dogs doing halfway through the year?

Now that we are through the first half of 2006, it is a good time to look at year-to-date performances for various stocks or indexes to get a sense of how the market has done and how your portfolio or strategy has performed. Market analysts do this regularly and there is no reason why an individual investor cannot do the same. In this article, I will take a look back at the six-month performance of the Dogs of the Dow stockpicking strategy. The Dogs may be a "buy & hold for a year" strategy, but this should not stop us from looking at how the stocks in that strategy have performed up to now.

Buy & hold strategies are supposed to take the guesswork out of the stocks you are supposed to buy and own. The Dogs of the Dow, a well-known version of the strategy, is just that type. If you have invested in the 2006 Dogs, it is a good idea to see where you are at the year's midpoint. If, however, you are looking at this strategy to see if it is worth trying out, it is also a good idea to take a look at how the Dogs are doing up to this point. Whatever the case, this review can shed some light on how effective the Dogs have been thus far.


FIGURE 1: THE DOGS OF THE DOW. Here are the 10 stocks that made up the 2006 Dogs of the Dow.

ANALYZING THE DOGS OF THE DOW
The Dogs of the Dow is a stockpicking strategy in which on the last trading day of the year, out of the 30 stocks that make up the Dow Jones Industrial Average (DJIA), you select the 10 stocks with the highest dividend yield. You buy equal amounts of each of the 10 in order not to be over- or underweighted in any stock and hold these 10 until the end of the year. The first thing to do is to see the 10 stocks that made up the 2006 version of the Dogs of the Dow. Figure 1 lists the 10 stocks that make up this year's Dogs.

So we know the closing prices of the stocks on the day they were supposed to be purchased. In order to see how they have done thus far, it is a good idea to place them in a comparison chart that will also reveal the closing prices roughly six months later. Figure 2 will do that without any doubt. The percentage change is color-coded for easy reference: Green is a positive return and red obviously serves to highlight a negative one.


FIGURE 2: SIX MONTHS LATER. Here's the six months' performance for the 2006 Dogs of the Dow.

The most striking change in value goes clearly to General Motors (GM). Amid bad news and an uncertain future, GM posted a 35% gain since the start of the year. AT&T posted a respectable 12% return. Overall, the Dogs of the Dow have four winners and five losers. JP Morgan is down slightly, but it is still down, so it counts as a loser. The biggest loser was Altria Group, which since January was down 5.5% along with DuPont, down 5.2%. As far as performance goes, applying the Dogs strategy would not have resulted in poor performance. The stocks that are down are not down by that much, while the stocks that are up have done fairly well.

Interestingly, during the preparation of this article, I went through the historical closing prices each week for each stock since the start of the year. Some major differences jumped out at me. Figure 3 shows the closing prices on Friday, June 9, 2006. The changes between the closing prices on June 9 and June 16 (Figure 2) are eye-opening.

Right off, the most astounding number is clearly the percent change in General Motors. From January 3, 2006 (the first official trading day of the new year), till Friday, June 9, 2006, GM returned an unbelievable 80% to the Dogs of the Dow shareholders. Those are impressive gains, and with a stock that arguably no one would have touted as a buy at the beginning of the year. While GM's share price has seen a pullback in only a week, AT&T actually did better, as well as Verizon and Merck. On the flipside, Citigroup, which was a winner at the close of June 6, is now a 2% loser. What is most interesting is that all this happened in about a week. Those are some big changes in such a small time frame.


FIGURE 3: WHAT A DIFFERENCE A WEEK MAKES (SOMETIMES). Here you see the change in performance of the 2006 Dogs of the Dow between 6/9/06 and 6/16/06. Clearly, markets can be very volatile, something to be mindful of.

SIMPLICITY RULES
Clearly, there is some merit to the Dogs of the Dow selection process. Its stock selection screener is simple for anyone to follow, and it seems to have done fairly well up to this point. Finally, some of these numbers can be quite eye-popping. While it is tough to see General Motors return 80% at one point and perhaps end up only returning 35% later on, this system requires holding these 10 stocks till the last trading day of the year. Who is to say GM will not rise higher? That also goes for the other stocks in this strategy.

Patience is the key. This midseason review is here to take a look at how this system is performing right now. It can serve as a frame of reference for those thinking about adding this strategy to their portfolio next year. All in all, the system is easy to follow and allows you to purchase stocks that you can feel safe owning for the coming year. The best thing about this strategy is that it removes the guesswork from the stock selection process. But whether the 2006 Dogs of the Dow yielded more winners or losers and whether or not it was effective will only be revealed in the final review at the end of the year.



John Devcic

John Devcic is a market historian and freelance writer. He may be reached at drmorgus@gmail.com

E-mail address: drmorgus@gmail.com


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