A Bullish Approach to “Dogs of the Dow”—Part Two

Walking Dogs | Dogs of the Dow Investment Strategy | Sheaff Brock | Bulls of the Dow

A Bullish Approach to “Dogs of the Dow”—Part Two

The well-known “Dogs of the Dow” concept focuses on choosing, out of the 30 stocks that make up the Dow Jones Industrial Average, those ten with the highest dividend yield. Based on investors’ intent to “buy low, sell high,” the guiding principle of “Dogs of the Dow” is that the dividend payout can be used as a measure of the average worth of the company, with a high yield signaling that the company is near the bottom of its business cycle.

Sheaff Brock’s “Bulls of the Dow” strategy is an offshoot of the “Dogs of the Dow” approach, and both are designed for growth while offering income from dividends. There are two highly significant differences between the two strategies:

  1. The selection of the ten “Dogs of the Dow” stocks takes place after the stock market closes on the last day of the calendar year. The strategy, then, involves investing an equal dollar amount in each of the ten stocks, holding that portfolio for the entire year to come. Unlike the “Dogs” list, the “Bulls of the Dow” strategy is rebalanced on a quarterly basis, judged by current scores for both fundamentals and downside risk.
  2. “Bulls” selections are based, not on the dividend ratios, but on each company’s downside risk scores. Fully 22 different factors are measured, including:
  • free cash flow
  • earnings growth
  • leverage
  • volatility
  • analyst revisions

In fact, as Managing Director Dave Gilreath explains, in portfolio selection, Sheaff Brock advocates erring on the side of caution, focusing on analyzing and managing downside risk. One of the numerous tools Sheaff Brock employs is Revelation Investment Research, Inc.’s Downside Risk report, or DRA, which is based on the premise that avoiding losers can be as important to portfolio performance as finding winners. In contrast with the “Dogs of the Dow” strategy (which selects the 10 stocks based on dividend payout alone), “Bulls of the Dow” managers consider trading volume, new equity issued by the company, and debt levels, along with general factors in the U.S. and global economies.

Like managers of a well-run football team, portfolio managers should consider offering long-term investors both offensive and defensive strategies, and that is precisely what the “Bulls of the Dow” strategy aims to do.

Share this post