Michael O'Higgins

Michael O'Higgins

Venezuelan-born Michael B. O’Higgins earned his BSc in Economics from Siena College, New York, in 1970. After graduation, he worked for Procter & Gamble before entering the investment business in 1971 as a stockbroker trainee for Spencer Trask & Co. He later went to work for White, Weld & Co, before opening his own money management firm O'Higgins Asset Management, Inc. in early 1978.

Michael has been the subject of articles in Time, Barron’s, Forbes, Business Week, Money Magazine, Financial World, Wall Street Journal, New York Times, USA Today and the Financial Times, as well as a special guest on CNBC’s Smart Money and a regular guest on PBS’s Nightly Business Report.                        

He is the author of the best-selling investment classic Beating the Dow, which popularised the very successful Dogs of the Dow strategy, and Beating the Dow with Bonds.

Summary

Can a simple and mechanical stock selection process actually beat the market?

That's the appealing belief underlying the Dogs of the Dow approach. 

The ‘dogs’ are the stocks on the 30 Dow industrial average with the highest Dividend yields. The approach calls for equal investment in the highest yielding stocks, with a total revamping of the portfolio every month, quarter or year. 

In theory, the approach takes advantage of the long-term positive returns associated with the market as defined by the Dow Jones industrial average and adds a bonus by its selection of only the highest yielding stocks. Higher yielding stocks are often temporarily out-of-favour issues that are possibly under-priced. In addition to greater price appreciation potential, investors should benefit from higher Dividend payments.

The investing public tends to overreact to unfavourable short-term developments and business cycles and drives prices of certain stocks down to bargain levels. Considerable blame is placed on large institutional investors that dominate market trading and which can thus cause sharp volatility. For individual investors, according to O'Higgins, this creates more opportunities than disadvantages, because they have greater flexibility to focus on the limited number of stocks in that approach.

The philosophy combines a strategy of investment in high-quality stocks with a contrarian approach.

The mechanics

The traditional Dogs of the Dow Dividend strategy is straightforward:

  • Select any starting day (the first trading day of the year is most common) and determine the 10 stocks of the 30 Dow Jones industrials with the highest current Dividend yield.
  • Invest an equal dollar amount in each of those 10 stocks.
  • After each month, quarter or year, rebalance the portfolio by again investing an equal dollar amount in each of the 10 highest yielding Dow Jones industrial stocks at that time.

Five-stock Dogs of the Dow approach

O'Higgins also suggests a more aggressive and selective five-stock approach:

  • Once you have determined the 10 highest yielding Dow stocks, identify the five with the lowest closing prices and invest an equal dollar amount in each stock.
  • Rebalance the portfolio periodically by again investing an equal dollar amount in each of the five highest yielding, lowest priced Dow Jones industrial stocks at that time.

It must be noted that a five-stock portfolio lacks diversification, making it much more vulnerable to a major setback in one particular stock.

Success Formula Dogs of the Dow (10 Stocks)

Determine once a quarter (e.g. at each quarter’s beginning or end) the 10 stocks of the 30 Dow Jones industrials with the highest current Dividend yield and invest an equal dollar amount in each stock.

Hypothetical performance back-tested

Data source: Bloomberg, Calculations: meetinvest

Disclaimer

Hypothetical performance is not necessarily indicative of future results. No representation is being made that any action will achieve profits or losses similar to those displayed. The result may be overstated as neither transaction costs nor bid/ask spreads nor slippage have been considered. Output equally weighted with maximum 5% allocation per position and rebalanced monthly. Holdings are systematically replaced when the screening criteria are not met anymore. No additional buying or selling rules (technical analysis) have been employed.

Historical monthly relative performance

How to read this graph:
A green bar shows how much the guru strategy outperformed the benchmark index in a particular month. A red bar shows how much the guru strategy underperformed the benchmark index in a particular month.

Data source: Bloomberg, Calculations: meetinvest

Disclaimer

Hypothetical performance is not necessarily indicative of future results. No representation is being made that any action will achieve profits or losses similar to those displayed. The result may be overstated as neither transaction costs nor bid/ask spreads nor slippage have been considered. Output equally weighted with maximum 5% allocation per position and rebalanced monthly. Holdings are systematically replaced when the screening criteria are not met anymore. No additional buying or selling rules (technical analysis) have been employed.

Historical portfolio turnover

Data source: Bloomberg, Calculations: meetinvest

Books

Success Formula Dogs of the Dow (5 stocks)

Identify once a quarter (e.g. at each quarter’s beginning or end) the 5 stocks with the lowest closing price among the 10 stocks of the 30 Dow Jones industrials with the highest current Dividend yield . Invest an equal dollar amount in each of these five stocks.

Hypothetical performance back-tested

Data source: Bloomberg, Calculations: meetinvest

Disclaimer

Hypothetical performance is not necessarily indicative of future results. No representation is being made that any action will achieve profits or losses similar to those displayed. The result may be overstated as neither transaction costs nor bid/ask spreads nor slippage have been considered. Output equally weighted with maximum 5% allocation per position and rebalanced monthly. Holdings are systematically replaced when the screening criteria are not met anymore. No additional buying or selling rules (technical analysis) have been employed.

Historical monthly relative performance

How to read this graph:
A green bar shows how much the guru strategy outperformed the benchmark index in a particular month. A red bar shows how much the guru strategy underperformed the benchmark index in a particular month.

Data source: Bloomberg, Calculations: meetinvest

Disclaimer

Hypothetical performance is not necessarily indicative of future results. No representation is being made that any action will achieve profits or losses similar to those displayed. The result may be overstated as neither transaction costs nor bid/ask spreads nor slippage have been considered. Output equally weighted with maximum 5% allocation per position and rebalanced monthly. Holdings are systematically replaced when the screening criteria are not met anymore. No additional buying or selling rules (technical analysis) have been employed.

Historical portfolio turnover

Data source: Bloomberg, Calculations: meetinvest

Books

Free Stock Screening Tool