The New Dow Strategy
In 1996-97

The Dow dividend strategy -- or, more idiomatically, the "dogs of the Dow" -- has garnered a lot of attention lately. It, or one of its variations, has been the subject of at least five full-length books in the 1990s as well as countless articles. An August 1996 STOCKS & COMMODITIES article covered just this subject and included a theoretical explanation for the success of the Dow dividend strategy and its progeny. Here's an update.

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Life is not always kind. When we compiled the 1996 record of the new Dow strategy, we knew that another year like any of the last five would be too much to hope for. In those years, our system outperformed more than 95% of all mutual funds each year. From 1991 through 1995, a $10,000 investment based on the formula of the new Dow strategy grew to $35,203. Over this five-year period, the system outperformed both the Dow Jones Industrial Average (DJIA) and the traditional 10-stock version of the Dow dividend strategy each year.

SYSTEM REVIEW
But before discussing 1996 performance any further, let's take a moment to review the system. The approach ranks those stocks that pay dividends. The ranking process is based on the current yield of the stocks relative to the estimated yield provided in the one-page review that Value Line publishes of each company. There's a right-hand column that lists Value Line's estimates for various facets of the company going forward; the current issue is estimating 1999-2001. The average annualized dividend yield is the estimated yield. The current yield divided by the future estimated yield I used as your normalized yield. Then the companies are ranked in order of the highest normalized yield to the lowest. Then buy the top 10 companies.

Returning to our discussion of 1996's performance, Figure 1 illustrates the problem of evaluating a system based on a small sample. Only one stock, AT&T [T], ended the year with a negative price movement (adjusted for stock spinoffs by The Wall Street Journal). But when it's one of only 10, its impact can be large. For example, if Woolworth, with its 69.2% price appreciation, had made our select portfolio, as it frequently did before eliminating its dividend in 1995, our performance would certainly have been up.

Excerpted from an article originally published in the April 1997 issue of Technical Analysis of STOCKS & COMMODITIES magazine. 
© Copyright 1997, Technical Analysis, Inc. All rights reserved.

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