Bulkowski's Dogs of the Dow

Written and copyright © 2009-2011 by Thomas N. Bulkowski. All rights reserved.

Downes & Higgins Riggins

In 1991, the team of Higgins and Downes introduced the world to what is now called the Dogs of the Dow strategy upon publication of their book, Beating the Dow, pictured on the right. They published a revision in 2000 (shown).

At the time, the book made quite a splash, including having a few mutual funds based on the strategy. Why? Because the technique, which I'll describe below, seemed to work well. According to them, following the method from 1973 to June 1991 would have made a cumulative profit of 1,753.14% compared to the complete Dow return of 559.31%, not including commissions and taxes. As fantastic as that seems, it's just 16.61% annually for the Dogs and 10.43% for the regular Dow stocks.

In 13 of 19 contests, or 68% of the time, the Dogs beat the Dow. However, according to one source, the Dogs only beat the Dow once in the last 5 years (in 2006). As of year end 2008, the Dogs have posted annual returns less than the Dow stocks in each of the last 1, 3, 5, 10, and 15 years. It's as if once a technique becomes well known, it stops working.

There are other variations of the Dogs of the Dow, namely the Flying Five, Little/Small Dogs of the Dow, Foolish Four, and Penultimate Profit Prospect. The Flying Five, Little Dogs, and Small Dogs of the Dow (all are synonyms) have flopped (failed to consistently outperform the Dow) over the last 1 to 15 years as well, according to one source I checked.

Dog Rules

Here are the rules for the Dogs of the Dow setup.

1. At the end of each year (or any period you choose), rank the stocks in the Dow Jones industrials according to yield (dividend/price).
2. Select the 10 with the highest yields. In case of a tie, select the stock with the lowest price.
3. Buy an equal dollar amount of each stock.
4. Hold those stocks for a year then go back to step 1.

Flying Five, Little Dogs, and Small Dogs of the Dow

Here are the rules for the Flying Five, Little Dogs, and Small Dogs of the Dow.

1. At the end of each year (or any period you choose), rank the stocks in the Dow Jones industrials according to yield (dividend/price).
2. Select the 10 with the highest yields.
3. From the 10 highest yielding stocks, select the 5 with the lowest price (that is, highest yield/lowest price).
4. Buy an equal dollar amount of each stock.
5. Hold those stocks for a year then go back to step 1.

1. Find the five lowest priced, highest yielding stocks as described above.
2. Throw out the lowest priced stock of those five.
3. Put 40% of your investment in the penultimate profit prospect (see above) and 20% in the other three stocks.

The Motley Fool website warns that performance since introduction has declined.

Dogs of the Dow: Historical Tests

My historical test of the dogs of the Dow, Flying Five, and Penultimate Profit Prospect shows the following.

1. Dogs of the Dow: In 16 annual contests from 1993 to 2008, the Dogs beat the remainder of the Dow stocks 44% of the time. Gains total 81% for the Dogs versus 104% for the remaining Dow.
2. Flying Five: The five win 50% of the time, compared to the remaining 25 Dow stocks over the 1993 to 2008 period, but the total gain is 92% compared to the remaining Dow's 135%. The losses suggest you are taking twice as much risk (21 percentage points) for the reward (11 percentage points).
3. Penultimate Profit Prospect: This also beats the remaining 29 Dow stocks 50% of the time but falls short on profits. Gains total 103% versus 132% for the remaining Dow stocks. You risk 44 percentage points for a reward of just 11 percentage points.

-- Thomas Bulkowski

Written and copyright © 2009-2011 by Thomas N. Bulkowski. All rights reserved. For every complex problem, there is a solution that is simple, neat and wrong.