Streetwise: How to invest using the Dow Five theory

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Not only is there no Holy Grail, there should never be even a hint of a guarantee as to an investment's performance. Yet, for some the search has become an obsession, while for others it is a hopeless crusade. In either case, their frustration leaves them vulnerable to the vultures that prey on the uninformed.

Nonetheless, there is one method anyone can use to build a decent portfolio in a period of about 20 minutes. Your total commission cost, using a discount brokerage house, should not exceed $45 and you do not have to look at your portfolio for a year.

Yes, it is time to revisit the investment theory developed and promulgated by money manager Michael O'Higgins.

This often-maligned methodology is most often referred to as the Dow Five theory, or Small Dogs of the Dow, and it was originally described in his book "Beating the Dow," (Harper Collins Publishers, 1991 and since revised). The strategy limits your horizon of possible investment candidates to the 30 companies that make up the Dow Jones industrial average.

The theory consists of selecting the five lowest priced of the Dow's 30 stocks from the 10 with the highest dividend yield. You buy an equal dollar amount of each of these five companies and hold the shares for one year.

On the anniversary of your purchase, you again identify the five lowest priced stocks out of the 10 with the highest yield and adjust your portfolio accordingly. Using a "Dogs of the Dow" mutual fund defeats the low cost, low turnover, aspect of the strategy.

Does the Dow Five theory work every year? No, of course not. Still, for 2013 the return was 30.6 percent, as compared to 31.9 percent total return for the S&P 500. Your year can start anytime. If you should decide to begin now, the list is: AT&T, Cisco Systems, Pfizer, General Electric, and Intel. The combined average dividend yield is 3.65 percent. For additional information, see Dogsofthedow.com.


Lauren Rudd is a financial writer and columnist; LVERudd@aol.com

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