Nobody can actually predict the performance of an entire stock index; however, using the so-called Dogs of the Dow strategy for picking top performers is profitable.
Dogs of the Dow is an investment strategy made popular in “Beating the DOW” a book by Michael B. O’Higgins. Prestigious publications, such as Barron’s magazine, The New York Times, CNN Money or The Washington Post have also echoed this system, which has provided interesting results. The strategy is to bet on companies that offer very the best dividend yields, preferably because they collapsed in the stock market the previous year.
Analysts point out that the strategy is to choose each year the 10 stocks with the highest dividend yield of an index, although many investors also try to include those that behaved badly the previous year.
This system provides, in theory, a certain advantage: obtain high dividends for our investment
By choosing those that provide a greater dividend, we may be choosing companies that are undervalued. Especially in periods of crisis in which many values suffer punishment due to circumstantial issues or issues external to their business. Since the dividend yield results from dividing the estimated dividend for that year / share price. This dividend yield would “normalize” if the share price increases.
Some results obtained by this technique
From 1957 to 2003, these ‘dogs’ obtained an average return of 14% per year, compared to 11% for the Dow Jones. If we look only between 1973 and 1996, the difference is even greater, 20% for ‘dogs’, compared to 16% for the benchmark.
In addition, the Dogs of the Dow strategy has beaten during the last seven years, consecutively, the index; the longest streak in history.
When should this strategy be implemented? The original method indicates that it is done at the beginning of the year, although in reality, another start date can be chosen, provided that the cycle of changes in portfolio reviews is respected every twelve months.
In a certain way, a contrarian investing system is automated, since we would be buying what the others are selling (values that have a high dividend yield, because their price falls), and selling what others buy.
Interestingly, although the strategy was originally derived from the DOW, it can be seen at work in other indices, such as in examples from the IBEX 35 in Spain. If we consider the values that have behaved worst in the portfolio in a year, the funny thing is that they tend to stand out among the companies that go higher. This happened again in the IBEX 35 in 2016 and 2017, so the question is clear: will the pattern be repeated in 2018?
Sabadell (MC: SABE), IAG (MC: ICAG) and Cellnex (MC: CLNX) which were the most punished in 2016, led the IBEX’s profits in 2017.
The same happened the previous year with Arcelor (MC: MTS), Acerinox (MC: ACX) and Repsol (MC: REP).
In 2018, possible winning picks include Gamesa (MC: GAM), Mediaset (MC: TL5), Abengoa (MC: ABGek) and Dia (MC: DIDA).
So, it appears the strategy can be applied to more than simply the DOW.
Other growth opportunities for 2018
Another hot topic is whether to invest in gambling stocks in 2018 or sports betting companies. Interestingly, we can see some indication of the growth potential by looking at examples such as William Hill and Betfair among others, as many experts see these as promising, being driven by increased online and, especially, mobile-based activity.
In some countries they have already established a presence, and are becoming increasingly popular. William Hill and Betfair are listed on the stock exchange. In addition to them, there is also Ladbrokes, a slightly less well-known contender, although already poised to take advantage of possible changes in U.S. gambling legislation through its purchase of a Las Vegas gambling company. There is much debate regarding pending changes to Nevada law which would allow online gambling to become legal across 50 states, a move which would see sports betting companies benefiting.
William Hill is listed in the United Kingdom and is one of the most historic and important betting establishments in the country. In recent years, it has entered strongly into European countries, the USA and Australia. Their income comes, mainly, from the online business and the physical betting locations they have in the UK.
Paddy power Betfair is an Irish bookmaker that has both a physical presence in the UK and Ireland (Paddy Power) and an online presence (Betfair). Their “businesses” are sports betting, casino games, arcade games (bingo, etc.), and horse betting, etc.
Ladbrokes is a British bookmaker that, like William Hill, has physical presence in the UK, mainly. It operates through the internet in several European countries.
In recent years, the company that has seen the most revaluation has been Betfair, followed by William Hill. Actually, the only one that has been revalued has been Betfair, while William Hill has remained practically flat. Ladbrokes have had a negative revaluation. Therefore, the winner in these years has been Betfair.
In general, they all quote high multiples of PER when only two companies have increased their profits in the last year. It is also striking that during the last year, all the companies obtained growth inferior to that experienced in the last 5 years.
However, the future seems bright as potential changes in gambling legislation in the U.S. will literally open a floodgate of online betting activity which these established companies will be more than willing to take advantage of in order to seek further growth and stake their claim in the U.S. market. Ladbroke’s purchase of a stake in Stadium Technology Group, a company dedicated to the technology behind sports betting shows their own vision for its importance in the future. So, investing in those sports betting companies which are looking to the future of their own industry seems to be a good strategy – just don’t expect overnight results. We should be in it for the longer term!
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