The TSX 60 'Dogs' May Not Be Sexy But They Have Bite

There is a popular investment strategy among passive investors,bulldogs-wanna-play known as the “Dogs of the Dow”, that has the ability to provide strong returns while minimizing risk... You organize the list of companies from highest yield to lowest, pick the Top 10 highest-yielding stocks, and invest in an equally-weighted portfolio for the year. It seems a little too good to be true - right?

Written by David Bar

The theory behind the strategy is that these stocks have underperformed over the last year, resulting in the high dividend yield (dividend payout/price of stock). However, in the following year, these stocks should outperform relative to the other constituents in the index. As the yield decreases, this is a product of the stock price increasing so the investor not only gets the benefit of a high yield on their investment dollar, but also the benefits of the capital gain.

At the end of the year the investor then reassesses the list, selling off the ‘dogs’ that have either been taken out of the index or have decreased their yield out of the Top 10, then restarts the process.

Between the years 1957 and 2003, when this strategy is applied to the DJIA it produces an average return of 14.3%, which is 3% higher than the Dow itself. Add in the impact of compounding over all of those years and the difference really starts to add up.

The Dogs of the Dow Applied to the TSX 60

So how might this strategy translate into the Canadian marketplace and more specifically the TSX 60? Well in 1987 David Stanley demonstrated just that when he outlined his version entitled Beating the TSX (BTSX). Based on historical performance, this strategy provided an average annual return of 12.47% per year between 1987-2013, compared to 9.89% for the TSX 60 Index.

If you implemented this strategy on the TSX 60 this past December, you would have generated a list of stocks similar to what is outlined in Figure 1, below.

Figure 1: Dogs of the TSX December 31st, 2016

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