Question

Some investors use a technique called the​ "Dogs of the​ Dow" to invest. They pick several stocks that are performing poorly from the Dow Jones group​ (which is a composite of 30​ well-known stocks) and invest in these. Explain why these stocks will probably do better than they have done before.

Answer 1

Step-by-step explanation:

Dogs of the Dow strategy works on the principle that by investing in blue-chip companies near the bottom of the business cycle - determined by their high dividend to stock ratio - an investor, in the long term, can outperform the overall market.

Strategy:

The steps for Dogs of the Dow are as follows:

1. Select the 10 highest dividend yielding stocks in the DJIA, after the stock market closes.
2. When the stock market opens, invest equal amount in each of them.
3. Hold the portfolio for a year
4. Reshuffle this portfolio annually to maintain equal exposure to the top-ten dividend performers.
5. Repeat step 1 at the beginning of each year.

How It Works:

This strategy works because the under-performers in the DJIA (the dogs) are still among the very good companies. Hence, despite going through temporary setbacks, they generally return to health as they adapt to the changing market dynamics.