Some minor stabilization crept in at the end of Monday’s session but there’s no incentiv...
Will 2014 Be the Small Dogs' Turn to Bark?
01/29/2014 7:00 am EST
It’s a New Year and time for the Dogs of the Dow, which is one of the longest running and easiest to implement strategies, says Guy Lerner of Tactical Beta.
The Dogs of the Dow is a stock picking strategy devoted to selecting the highest dividend paying stocks in the Dow Jones Industrial Average. Yield is the annual dividend from a company divided by its stock price. The higher yields of the “Dogs” signal that their stock prices have declined the most among the Dow’s 30 blue-chip companies. In essence, the goal of the strategy is to earn more dividend income and hope that the stocks also mount a comeback. The Dogs are bought on the first day of the year and sold on the last day of the year.
Traditionally, the Dogs of the Dow invest in the 10 highest yielding stocks; there is a variant, known as the “Small Dogs,” that invests in the five highest yielding and lowest priced stocks. This column will follow the “Small Dogs.”
This year’s Small Dogs are:
Here is a table showing the total returns for various calendar years ending December 31, 2011. What should be noted is that this strategy is NOT protective during a bear market. Of note, the traditional Dogs of the Dow (10 stocks) outperformed the Dow Jones Industrial Average by 700 basis points in 2013.
Dogs of the Dow Returns
We will look at two portfolios in this column, and both will utilize the five stocks in the “Small Dogs.” The first portfolio will be passive and reflect the normal buy and hold philosophy of the original strategy. For bookkeeping purposes, this strategy will utilize the opening prices from the first trading day of the year (January 2, 2014). This is table 1 below. This passive portfolio was started with $99,992.71, and each equity has received a 20% allocation.
Table 1. Small Dogs/ Passive Strategy
The second portfolio is active and we will attempt to improve our returns through more timely entries and exits. This will be the thrust of the analysis in this column. This active portfolio will start with $100,000, and these positions will be discussed in the following pages. Unless otherwise stated, all charts used in this analysis will be on a weekly time frame.
Table 2. Small Dogs/ Active Strategy
1) We were buyers at support and prices remain at this level.
1) I would be a buyer at the 29.38 support level.
General Electric (GE)
1) We were buyers of GE at the 27.37 level and we sold our position at Friday’s close with a weekly close below 26.86.
2) I would be a buyer at 24.68.
1) I would be a buyer at the 24.43 support level.
1) Look for a test of support and to be a buyer at 21.58.
The active portfolio continues to outperform the passive portfolio, and the differential has widened this past week rather significantly. We still wait for opportunities to put our capital to work.
By Guy Lerner of Tactical Beta
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