Dogs of the Dow Annual Performance

by billb 31. December 2007 12:58
I heard a talking head recently tell me how the Dogs of the Dow performance this year was fairly poor.  I follow the Dogs of the Dow strategy just like I follow my own, but thought I would take a deeper look.  First a couple of thoughts on the strategy.  My criteria for following strategies on a real time basis are as follows:
  1. Past research has shown that the strategy demonstrates an edge
  2. The strategy can be reasonably traded in a real world environment
  3. The strategy has some reasons why it cannot easily be backtested in an automated fashion.

Oh, and if you're not familiar with the Dogs of the Dow theory, I've written about it before, but I'll give you the quick overview.

The strategy is that blue chip companies do not alter their dividend to reflect trading conditions 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 yield, with high dividend relative to price, are near the bottom of their business cycle and are likely to see their stock price increase faster than low yield companies. Under this model, an investor annually reinvesting in high-yield companies should out-perform the overall market.
Source - wikipedia
Simply put, at the beginning of each year, you hold the ten DJIA stocks with the highest dividend yield.  With my other strategies, I've been creating virtual accounts at Marketocracy and away we go.  Fortunately for the DoD, there is a long running site that tracks the performance of this strategy.  It's appropriately named DogsoftheDow.com.  You can see the performance broken down by various time frames.  They send updates via email each week if you sign up (it's free).  You can see the annual performance to date by clicking here.  It's very at a glance that the DoD have underperformed the overall market pretty dramatically.
 
What does this mean moving forward?  Will there be a reversion to mean and the DoD will significantly outperform the Dow within the next few years?  Or is the DoD concept broken?  What's interesting about these questions is that these are the very same questions that trading system developers ask themselves when things aren't going quite as good as the backtest may have indicated.  Or worse yet, your trading system is experiencing maximum drawdown.  I thought it might be fun to revisit this article next year and maybe over the next few years to see how the DoD does.

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