Wednesday, March 4, 2009

How to Invest Using Dogs of the Dow method with SGX shares

Our fellow blogger at www.passivelifeincome.com mentioned to us before about this theory called Dogs of the Dow. It has a weird name and we thought it sounded like a movie show. Anyway, as we read more into it, apparently, some fund managers ( Merill Lynch) have been marketing a fund based on following this dogs of the dow strategy. So let's delve more into it and apply it to Singapore context. As the name implies, this strategy is actually done with Dow Jones Industrial Average (DJIA) companies.

So how effective is it? Show me the money..no money no talk! Read on!



What are the steps for the Traditional Dogs of the Dow method?
(This is a summary of what has been written by other people)
Step 1: Fix a date ( usually end of the year but any date is fine). Be disciplined and stick with this date, always.

Step 2: Select the 10 stocks which have the highest dividend yield. Even though it has not been mentioned, we will exclude REITs or TRUSTs simply because, the DJIA does not contain Reits or Trusts, so this is by inference. Since this method was for DJIA stocks which are the largest, so by inference again, this would mainly refer to blue-chips stocks in Singapore context. And this is the STI component stocks ( REITs and TRUSTs are striked out):
Capitaland, CapitamallTrust, City developments, Cosco Corp, DBS, Fraser and Neave, Genting International PLC, Golden Agri-resources, Hong Kong Land Holdings, Jardine Cycle and Carriage, Jardine Matheson Holdings, Jardine Strategic Holdings, Keppel Corp, Keppel Land, Neptune Orient Lines, Noble Group, Olam International, Overseas-Chinese Banking Corp, Sembcorp Industries, Sembcorp Marine, SIA Engineering, Singapore Airlines, Singapore Exchange Limited, Singapore Press Holdings, Singapore Technologies Engineering, Singapore Telecommunications, STARHUB, United Overseas Bank, Wilmar International, Yanlord Land.

Step 3: Allocate your funds equally to the 10 stocks.
Step 4: On the anniversary, sell the 10 stocks to get your funds, add somemore funds if you want to and repeat the steps.

As can be seen in the document above, the Small Dogs of the Dow seem to be doing better! So.....a little refinement.
From Step 2 above, choose 5 stocks among the 10 stocks that have the lowest closing price and allocate your funds equally among these 5 stocks, instead of the 10 stocks.These 5 stocks are the so-called "Small Dogs of the Dow".

So whats the bloody logic?
The logic behind this is that a high dividend yield suggests both that the stock is oversold and that management believes in its companies prospects and is willing to back that up by paying out a relatively high dividend. Investors are thereby hoping to benefit from both above average stock price gains as well as a relatively high quarterly dividend.

What does SGDividends think about his logic?
Frankly, we think their logic is a bit logical as we have mentioned before ( in our opinion) that its always better to get some money back in the form of dividends as we wait for capital appreciation, so choosing the beaten down stocks with a high dividend yield makes sense. But then we dislike it as its just too mechanical...like why is this stock beaten down..e.t.c...read our post on DIY investing for our preferred method. Anyway, notice the footnotes, note 3 in the above document taken from http://www.dogsofthedow.com/, it states reliable sources and we are extremely skeptical with such things. Why not tell us which sources are those? My mum is reliable... so is my grandfather..get the drift.... Having said that, its track record sounds good..so we will just shut up for now.

So what are the stocks? Say it and stop beating around the BUSH!Bitch!

Dog of the Dow - Compiled by SGDividends.blogspot.com


Important: The objective of the articles in this blog is to set you thinking about the company before you invest your hard-earned money. Do not invest solely based on this article. Unlike House or Instituitional Analysts who have to maintain relations with corporations due to investment banking relations, generating commissions,e.t.c, SGDividends say things as it is, factually. Unlike Analyst who have to be "uptight" and "cheem", we make it simplified and cheapskate. -The Vigilante Investor, SGDividends Team

6 comments:

  1. even after rights issue, DBS dividend yield so high?

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  2. Heya there.

    You make me feel bad for not updating my Dogs of STI. ;p

    But yea, a really good post you have there. I was hoping do up a trial portfolio track Dogs of STI and backtracking its performance according to the rules. If i am not lazy, I hope to get down to this someday.

    Kudos!

    ReplyDelete
  3. Hi Marvin,

    The dividends yeild was taken from a brokerage house and its based on the latest dividends data.

    Not sure if DBS will reduce their dividends going forward due to the rights? ( have they annouced they will reduce?We are not sure as we don't follow DBS).

    So based on the latest 4 quarters of dividends...the dividends yeild is about 9-11%.

    SGDividends

    ReplyDelete
  4. OCBC securities is forecasting forward dividend yield of 4.1% (analyst report dated 4 Mar 09).

    How can a company after issuing 1 for 2 rights issue maintain its dividend yield.. unless its planning to returning the money raised during the rights issue which is sort of defeats the purpose of the rights issue?

    ReplyDelete
  5. Hi Marvin,

    What you say is very logical. Very likely DBS will have to cut its dividend after the rights issue.

    Think DBS will have to drop out from being one of the dogs then.

    Thanks for the heads up =)

    SGDividends Team

    ReplyDelete
  6. I used to be a big fan of the dogs of the dow theory but not anymore the method of picking stocks the worst performing stocks in the dow jones is no longer working as well as it once did.

    ReplyDelete