If you thought that stock markets are all about the bulls and the bears, think again! Dog stocks are a good bet to invest in, if you are among those interested in high yields, but without wanting to invest too much time on tracking stock price movements on a regular basis. Simply put, dog stocks are high dividend-yielding stocks. This can be an especially good investment avenue for risk averse investors who fear a 2008-type market crash and are worried about returns on equity investments.
The concept of dog stocks as an strategy for picking stocks is based on a 1982 concept on ‘Dogs of the Dow’, which was eventually popularised in the early 1990’s by Michael B O’ Higgins. The system urges investors to choose, once a year, 10 stocks from the benchmark US index — Dow Jones Industrial Average (DJIA) — that have the highest dividend yield — i.e, the percentage of dividend paid per share of the company divided by the scrip’s market price. The rationale behind using a high dividend yield as a filter for choosing a scrip is that the dividend and not the stock price is a true measure of a company’s worth. Companies that pay high dividends are generally seen as stable and dependable in the long run. Further, if the stock is part of any benchmark index — be it the Dow or the Sensex — it has to be fundamentally good and will weather most market crash.
The investment corpus should be ideally divided equally amongst all 10 stocks that have been picked. Investors can hold on to the stocks for a little more than a year and then re-examine and replace their picks. The strategy has to be repeated for a couple of years at least to get the best returns, as over time the Dogs of the Dow have outperformed even the DJIA.
The Dogs of the Index strategy for investments in equity is also, though not very often, used in India, using the benchmark 30-share sensitive Bombay Stock Exchange Sensex, the BSE 100 or even the National Stock Exchange Nifty Fifty. Apart from this, there are also other options such as dividend yield mutual funds, where investors can limit their direct exposure to such stocks or not even have to put in long hours in choosing these stocks and are still assured of a stable flow of income.