Most winning stock market strategies tend to lose their effectiveness over time, assuming they actually worked in the first place, because their popularity erodes their value.
The “Dogs of the Dow” strategy is one that still often works. Here’s how and why, and what it says.
First articulated in 1991 by money manager Michael B. O’Higgins, the strategy calls for annually buying the ten Dow Jones Industrial Average stocks whose dividends are the highest fraction of their price. The theory, which O’Higgins said he back-tested to the 1920s, is that a blue-chip, Dow stock’s dividend is a more reliable indicator of a company’s value than its fluctuating stock price. This should mean that companies with a high dividend yield relative to their stock price are near the bottom of their business cycle and are likely to see their stock price increase faster than low-yield companies.