The Issue Investigated
The “Dogs of the Dow” investment strategy promises investors abnormally high returns in the top yielding stocks from DJIA (Dow Jones industrial averages). The article investigates the Dow of Dogs myth which was propagated analyst John Slatter in an article titled study of industrial average in August. Since its inception, the myth became quite popular. The popularity of the myth is measurable by the not only sale of its publications but also by the investment trust and mutual funds tied on the basis of its investment philosophy. The analysis in this article shows that there is no evidence to support the myth’s allegations. The widespread publication of the myth has made many investors believe in its effectiveness thus many investors who relied on it lost substantial investment(Hirschey, 2000).
Investors used the misleading myth because they believed it could help them earn substantial returns (Jon, 2016). The perceived advantage of Dow Dogs is attributable to the data errors undetected in the formulation of the strategy. For example, Slatter’s analysis shows a total return of around forty-four percent for DJIA in 1974 yet the market gave negative returns. Further analyses of his data show that it had a huge deviation with that of fellow researchers. Relying on excessively wrong data automatically leads to the formulation of the inapplicable theory.
Data Used In the Analysis
The returns of Dow Dogs from 1961 to 1998 are used as well as those of DJIA. The companies considered as DJI A are among the most liquid, the largest and the frequently analyzed on Wall Street (Hirschey, 200).
Methodology
Dividends of the following year are approximated to be four times more that those paid in last quarter of the current financial year. The expected dividends of the following financial year are then divided by first-day stock price to get dividend yield. Then the returns of DJIA are compared with those of Dow Dogs. The comparison is made using a table to show Dow Dog advantage before imposition of transactional cost in five years and ten years respectively (Hirschey, 200).
Findings
The abnormally high returns over 1961-1998 investment horizon of Dow Dog disappears upon careful and accurate recalculation of its return considering both taxes payable and transactional cost. It was inappropriate for Slatter to exclude transactional costs in his analysis because high yield stocks attract relatively high-income taxes on dividends. Moreover, the high yield bonds attract high brokerage commission, capital gain taxes, and bid-ask spread costs. The over performance of Dow Dogs is associated with the bear market of 1973 to 1974. The poor performance of Dow Dogs is found in the 1990s. The inconsistency of Dow Dogs performance was realizable when researchers snooped through the annual returns data in the search for elaborate market-beating strategies (Hirschey, 200).
References
Hirschey, M., 2000. The “dogs of the Dow” myth. Financial review, 35(2), pp.1-16
Jon, O. C. (2016, January 4). Meet the Full 2016 Dogs of the Dow for Massive Dividends.
Retrieved March 23, 2016, from http://247wallst.com/investing/2016/01/04/meet-the-full-2016-dogs-of-the-dow-for-massive-dividends/
