If you’re an investor who doesn’t have time to tediously analyze a company’s financial statement, or are a beginning investor that simply isn’t sure what to look for, then investing in high yield Dow stocks can be a fantastic way to invest.
In 1991 investor Michael B. O’Higgins (his book) developed an investment strategy called “Dogs of The Dow” that necessitates only spending about 15 minutes of research per year to find the highest dividend Dow stocks. You’ll invest in a select portion of them, then forget about them until next year when it’s time to adjust your portfolio. It’s been proven to outperform the market, is extremely easy to do (no analyzing financial reports, or technical indicators here!), and on top of that you’ll earn a nice dividend payment every quarter. What can be better than than?
To start, find the current stock price and the dividend yield for all 30 Dow stocks. Then, narrow your list down to only the 10 highest yield stocks in the Dow. You’ll rank these 10 stocks based on their stock price, lowest to highest. The cheapest stock should have a 1 next to it, the next cheapest a 2, and so on. Here’s an example of what your chart would look like as of June 11, 2013:
|Company||Stock Ticker||Dividend Yield||Price|
|8||Johnson & Johnson||JNJ||3.10%||$85.14|
A faster and even easier way to find these stocks is by using DogsOfTheDow.com which already has the list compiled for you.
Before we get into the 4 strategies for investing in these stocks, lets discuss stock number 2 for a second. O’Higgins calls this stock the Penultimate Profit Prospect, or PPP. Essentially, this is the stock that has historically returned more than all the other Dow stocks. Be careful though, this isn’t always the case, and we’ll look at that further in just a second. Also be wary of the lowest priced stock. This company is often facing genuine trouble which is the reason for its low price. The second lowest price stock though is not typically in trouble, and is merely a great bargain.
Now that we have our chart compiled, there are 4 different strategies for investing in these 10 stocks:
With this technique you’ll simply invest an equal amount into each of the 10 stocks. Simple enough.
Dow High 5
Here, you’ll invest equally in the 5 stocks with the highest dividend yields. In the chart above, you’d invest in AT&T, Verizon, Intel, Merck, and Pfizer.
Dow Low 5
With this strategy you’ll buy the 5 lowest priced stocks. O’Higgins advises this strategy because historically it’s yielded the highest returns on a consistent basis. In the chart above you’d invest in General Electric, Intel, Pfizer, AT&T, and Merck.
Here you’ll put all of your money on stock number 2, the penultimate profit prospect. In the above case, it’d be Intel.
The Winning Strategy
Now that we’re familiar with the 4 different strategies, lets look at which ones have historically performed the best. In 2009 investment advisor Mark Pankin analyzed the data for the 37 years ended December 31, 2008, and summarized how each of these strategies performed in the chart below:
|Strategy||Average Annual||Best Year||Worst Year|
|Dow High 5||6.8%||61.2%||-48.8%|
|Dow Low 5||9.4%||60.8%||-51.5%|
|Dow Jones Ind. Avg.||6.4%||38.3%||-33.8%|
From the chart you can see that while the Dow 1 has the potential to have a tremendous year, it also can have a tremendously bad year. If you’re looking for a “set it and forget it” type approach, which is what this strategy is great for, then Dow Low 5 has consistently been the top earner of the bunch.
I’ve personally used this strategy to invest in stocks over the past couple years, and found it to be a great way to invest in large, well established companies while earning great returns. Add in the dividend you’ll receive every quarter, and you’ll be well on your way to consistently earning great returns on your investments year after year.