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High Performance Graham
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Growth Eh?
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The Coffee Can Portfolio
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Car bites dogs
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So easy, so profitable
Top Trusts 2005
Dogs of the Dow
Top 200 2005
Money for nothing
Yield of dreams
Return of the master
Norm Speaks
these dogs can bite
I bought Philip Morris stock by the truckload back in 1999 when the U.S. cigarette maker was mired in a messy round of litigation. I poured my few remaining pennies into Laidlaw, the Canadian waste disposal and school bus company, which was caught up in an accounting scandal.
Why did I buy such a pair of dogs? Precisely because they were Dogs. I look for value and the Dogs of the Dow strategy, which focuses on stocks with high dividend yields, is a fine place to start.
The Dogs strategy sticks to big blue chip stocks such as the 30 that make up the Dow Jones industrial average or the 60 stocks in the S&P/TSX 60 index. The reasoning is that these huge companies are unlikely to go bust, so you should be able to buy them when they are beaten up Dogs and benefit from their juicy dividend yields. At least that's the theory. In the classic Dogs of the Dow methodology, invented by the U.S. stockbroker Michael O'Higgins, you pick the 10 stocks in the Dow with the highest dividend yields, hold them a year, then replace them with a new crop of Dogs.
Back in 1999, the Dogs strategy looked like a sure winner. It had beaten the market for years. But in my case the results proved to be dismal. Within weeks, Philip Morris sank 24% and a big chunk of my net worth went up in smoke. Laidlaw paid me one measly dividend and then slid into bankruptcy.
My enthusiasm for the Dogs of the TSX began to fade. Simultaneously, other Dogs followers also suffered when TransCanada, a perennial Dog, slashed its dividend. To compound matters, just as the Dogs were losing money hand over fist, high-tech stocks were shooting upward.
It's difficult to stick with the Dogs at such times. But staying with a sound strategy through thick and thin is the best way to make money in the long term. Otherwise, you wind up buying high and selling low all too often.
Want proof? It turns out that 1999 was the worst year on record for the Dogs of the TSX. David Stanley, University of Guelph professor emeritus, tracks the Dogs of the TSX and rebalances his portfolio each year on May 25. Stanley calculates that the Dogs have gained an average of 13% a year since 1987, trouncing the index by 3.6 percentage points a year. Even if you had the misfortune of buying into the Dogs, as I did in 1999, but kept with them, you would have gained 9.9% annually and beaten the index by 0.7 percentage points.
Another lesson I learned from my Dogs experience is that you can't just assume a big company is a safe company witness Laidlaw's bankruptcy. True to form, this year's Dogs of the TSX are a mixed bunch. They are (with symbol, price and yield): TransAlta (TA, $18.05, 5.5%), BCE (BCE, $28.92, 4.6%), TransCanada (TRP, $29.80, 3.9%), Bombardier (BBD.SV.B, $2.38, 3.8%), CIBC (CM, $72.23, 3.6%), Royal Bank (RY, $64.25,3.4%), National Bank (NA, $49.56, 3.4%), Bank of Nova Scotia (BNS, $40.70, 3.1%), Enbridge (ENB, $59.70, 3.1%) and Bank of Montreal (BMO, $57.76, 3%). The riskiest is perhaps Bombardier, which is trying to resuscitate its airplane business and isn't earning enough to cover its dividend. (For what it's worth, among this year's dogs, I own BCE and TransCanada.) In the U.S., the Dogs of the Dow have also provided strong long-term performance. Jim Jubak of MSN.com calculates that from 1928 to September of last year, the strategy returned an average annual compounded rate of 13%, almost two percentage points a year better than the Dow industrials. This year's Dogs (with symbol, price in U.S. dollars, and yield) are SBC Communications (SBC, $25.77, 5.01%), General Motors (GM, $40.06, 4.99%), Altria (MO, $61.10, 4.78%), Merck (MRK, $32.14, 4.73%), Verizon (VZ, $40.51, 3.8%), JP Morgan Chase (JPM, $39.01, 3.49%), Citigroup (C, $48.18, 3.32%), DuPont (DD, $49.05, 2.85%), Pfizer (PFE, $26.89, 2.83%) and General Electric (GE, $36.50, 2.41%).
Thankfully, I held onto my Dog of the Dow and Philip Morris (now re-named Altria) has more than compensated for my Laidlaw loss. I still think the Dogs strategy provides a good starting point for conservative investors. So look through this year's list to find Dogs that might be right for you. Just be sure to avoid my mistake and do a little extra digging before investing.
From the February/March 2005 issue.
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A Dan Hallett and Associates Inc. publication. Norm Rothery, Ph.D., CFA, is the Chief Investment Strategist at Dan Hallett and Associates Inc. (DH&A) and the founder of StingyInvestor.com. DH&A is registered as Investment Counsel in the province of Ontario. Norm, DH&A, or related-parties may have an interest in the securities mentioned. More...