The “Dogs of the Dow” is an investing strategy that involves trading only once a year, as the calendar rolls over. Over time, the strategy has a track record of slightly outperforming the Dow itself, beating the index in nine of the last 14 years, albeit by an average of 1%. But the strategy’s most attractive characteristic—aside from its catchy name—is its simplicity. All you do is buy the 10 highest-yielding stocks in the Dow Jones Industrial Average at the beginning of each year. Next year, you replace any stocks that are no longer among the 10 highest yielders.
The idea behind the system—buying high quality companies whose stocks have had a bad run—is sound, but the Dogs’ “outperformance” isn’t strong enough for me to endorse the system wholesale. However, I think investors can use the annual list of Dogs of the Dow as a short list of potential investments—and can also apply the principle to other high- quality stocks that aren’t in the Dow.
Looking beyond the Dow (which is only 30 stocks, and pretty stodgy ones), I think Target (TGT) looks like a 2015 “Dog” worth owning in 2016.
The company is as high quality as anything in the Dow, but has declined 2% over the past year, despite beating analyst estimates in every quarter. I put TGT back on Buy for my Cabot Dividend Investor members earlier this week, after the stock delivered good relative strength in December and early January. Yielding 3%, TGT is an appealing bargain here for risk-tolerant investors.
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