The Dogs of the Dow is an investment strategy popularized by Michael B. O’Higgins in 1991 in which an investor annually invests in the ten Dow Jones Industrial Average stocks whose dividend yield is the highest. “The Dogs of the Dow” is named because the stocks with the highest dividend yield are viewed as “dogs” that no one wants at that time.
The Dogs of the Dow strategy takes advantage of the fact that blue chip companies do not alter their dividend to reflect trading conditions in the stock market and, therefore, the dividend is a measure of the average worth of the company. The stock price, in contrast, fluctuates through the business cycle. This should mean that companies with a high dividend yield, are near the bottom of their cycle and are more likely to see their stock price increase faster than low yield companies.
Under this model, an investor annually invests in high-yield companies that should out-perform the overall market. The investor is reward for waiting for the price to increase by a relatively high dividend yield. The logic here is that the high dividend yield suggests that the stock is oversold and that management believes in the prospects of the company as demonstrated by a higher dividend.
Higgin’s used data mining to demonstrate The Dogs of the Dow theory.