Dogs of the Dow (Foolish four?)
Dividend investors employ a variety of popular approaches to pick stocks including dividend growth, relative dividend yield and the Dogs of the Dow.
This article (source: http://www.ndir.com) is focusing on the Dogs of the Dow which is wildly popular in the U.S. but has its flaws.
The basic Dogs formula is to buy an equal amount of the top ten yielding stocks in the Dow each year. The approach was first advocated by Michael O'Higgins in his book Beating the Dow. From 1973 to 1996 the Dogs of the Dow returned 20.3% which far surpassed the Dow's return of 15.8%. O'Higgins also suggested two variants which one can call the Dow Five and the Dow Four. The Dow Five is formed by selecting the five lowest priced of the Dogs of the Dow. The Dow Four further refines the list and holds the four highest priced of the Dow Five.
The Motley Fool (www.fool.com) went a step further and created the Foolish Four. The Foolish Four tweaks the Dow Four by putting 40% of the portfolio in the lowest priced stock and 20% in each of the others.
Why bother with all of these variations? Each has a better performance record than the last. With strong past performance many investors jumped on the Dogs bandwagon.
High Dividend Yield Strategies in the period 1973-1996 (Strategy & Average Annual Return)
DJIA 15.80% per year (!)
Dogs of the Dow 20.31% (per year !!)
Dow Five 23.40%
Dow Four 26.41%
Foolish Four 28.03% (per year !!!)
Source: Mining Fool's Gold
"Of course" this stats could not sustain forever, so AFTER 1996 the great performance of some of these strategies vanished and fool.com even abolished its positve conclusion from their Foolish Four picking strategy. Still, in order to praise OLD strategies which worked for some time - let's see, how the "Foolish Four" - Strategy would have done in 2015 so far - in the period: Jan. 2015 up to 11th Nov. 2015 (intraday CET 6 p.m.):
stock price as per 11th Nov. 2015: T (32.94 USD), VZ (45.32 USD), PFE (33.88 USD), KO (42.03 USD)
Verizon Communications, Perf./capital gain only/Year-to-date:
+3.22% (excl. Dividend yield: 5.73% as per 11th Nov. 2015)
+ 1.11% (ex Dividend yield: 4.88% as per 11th Nov. 2015)
+12.1% (ex Dividend yield: 3.31% as per 11th Nov. 2015) => would have been the 40%-weighted stock
Coca Cola, YTD:
+1.45% (ex Dividend yield: 3.16% as per 11th Nov. 2015)