Dogs of the Dow
I recently came across a strategy for stock trading. I won’t promise to make you rich overnight, but I found this trick to be very interesting. The basic idea is to buy the stocks of ten companies from the Dow Jones Industrial Average (DJIA) with the highest dividend yields. Dividend yields are defined as the ratio between the dividends distributed and the stock price. Hold them for a year, and re-evaluate your position after one year. You might have to replace lower performing stocks with newer ones to re-balance your portfolio.
From a modeling perspective, the yield is an inverse indication of the stock’s popularity. High yields typically mean undervalued stocks. Hopefully, by the end of the year, these companies have bounced back increasing stock price and decreasing yield. Of course, as with any investing strategy, the effectiveness scales inversely with the number of people following the strategy. This could explain the decrease in popularity and overall poor performance of this strategy in recent years.
That is all.