The Dogs Of The Dow Trading System & Strategy has been around since at least the early 90s and exists in a couple of different forms. The strategy involves tracking the 30 stocks in the DJIA and each year selecting the 10 stocks with the highest dividend yield. Each year the portfolio is rebalanced so that you always hold the 10 stocks with the highest yield.

Since dividend yield often moves inversely to price, this is essentially a contrarian strategy where you are selecting some of the weakest performers from the index.

According to this analysis from Steve Auger, the Dogs of the Dow strategy has been an effective one, outpacing the Dow index by a decent margin since 1999:

Dogs Of The Dow Trading Strategy

Dogs Of The Dow Trading Alternative Trading Strategy

Another variation of this strategy is to go long stocks that have been removed from market indexes.

For example, when the S&P 500 announces constituent changes, go long the stocks that have been removed.

These ‘dogs’ often see compulsory selling by fund managers who track the market indexes and this heavy selling leaves them technically oversold and potentially undervalued.

This anomaly has been documented in the UK market with success. Research from Jay Dahya in 2006 found that “deletions to the index are associated with a negative price response, which is fully reversed over a 120-day period after news of the removal from the index.”

Dogs Of The Dow Trading System & Strategy:

Go long the 10 highest dividend yield stocks in the DJIA and rebalance each year.

Alternatively, track stocks that have been removed from major indices like the S&P 500 or FTSE 100 and go long after heavy selling pressure around the announcement. Hold for up to four months to capture the full reversal.

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