While browsing through some ET articles, came across this article on Dog Stocks. This is the first time I heard that term. Upon further noodling this was the learning for the day 🙂
What are Dog Stocks?
Dog stocks, originally called Dogs of the Dow is a stock picking principle which follows the idea of selecting ten Dow Jones’ stocks with dividend component as the highest fraction of their price. It was first popularized by Michael Higgins. The key component is that the selection needs to happen on an annual basis. In his original proposition, Higgins selects 10 out of the 30 stocks in DJIA with highest dividend yield.
Extending Dog Stocks concepts to other markets
I think it’s up to the investor’s purview of how many stocks to select if the investment is outside DJIA. For example, in the case of Nifty 50; we could choose 17 (~1/3rd). In fact, there are many variants of how many to select in Dow itself like Dow 5 (based on lowest share price among the lot), Foolish 4 developed by Motley Fool (considering proportion of investment amount) etc.
Components of Dog Stocks
As mentioned above, the stock picking strategy is simple. But it’s a long term strategy mostly following a calendar year. The underlying thought behind this investing principle is that some stocks in the index may seem underperforming; but since they are valuable companies by the very fact of its inclusion in index — they will start performing soon. Once the market prices is higher, the investor can sell them. In this concept, those stocks giving good dividends are considered valuable stocks.
Another ratio usually considered while picking the list is Price to Earnings ratio. Such stocks tend to have lower P/E ratio when compared to industry peers.Debt to Equity ratio will also be lower for these stocks. It is also key to review the last few years’ dividend yield to ensure the trend is continuing.
What do you think about dog stocks? do they need to be a key part in your portfolio?