The Ignorant Investor

The investing strategy known as the "Dow 10" or the "Dogs of the Dow" is having a banner year. A chart provided by the Wall Street Journal shows it far outperming the rest Dow overall. The strategy involves buying the 10 stocks in the Dow with the highest dividend yields, though the Journal doesn't point out when they get sold. (Do you simply replace them every January with the new dogs?)

The strategy is not a guaranteed winner- it's had positive returns in only 2 of the past 6 full years (2000-2006). However, this was during a miserable time for the Dow overall, a period that included a major crash and a recovery in which investors favored small caps, foreign stocks, gold, and real estate over the mega-caps.

If you compare it to the Dow overall, you'll see that it lost less value than the Dow by small margins during the bear market of 2000-2002, topped it in 2003, and was just barely behind it in 2004. In 2006 it's been trouncing the Dow overall because GM's recent outperformance. The only really bad year for strategy in the past six years was in 2005. Which was a stinker.

Problem is, everyone is talking about it now. In the past when the Dogs of the Dow became popular it quietly lost its performance advantage. Expect the same now.