Dogs of the Dow is a popular investment strategy based on the theory that high dividend yields indicate undervalued stocks. The mechanics are simple. Each year, rank the 30 stocks comprising the Dow Jones Industrial Average according to dividend yield. Buy equal dollar amounts of the 10 stocks with the highest yield. Hold the stocks for a year, and repeat the process annually.
Aggressive investors buy the five lowest-priced stocks from within the same group.
If you can t afford to buy individual stocks, you can buy mutual funds, unit investment trusts, and variable annuity subaccounts that use the dogs strategy. Results appear impressive. The dogs have beaten the Dow just 4 times in the 1990s, although I suspect this is due to the general underperformance by value stocks, and not any failure of the strategy. First, the high dividends are taxed as ordinary income in the year you receive them. And second, the strategy forces you to realize capital gains each time a stock drops out of the high-yield group.