Many investors will be familiar with the term The Dogs of the Dow. Intuitively, many investors probably assume this term refers to a system for selecting stocks based on last year's poorly performing ("dog") stocks in the expectation that they will become this year's better performers.
This is actually a misconception. The theory behind The Dogs of the Dow is actually based upon building a portfolio based on lagging, high quality, blue-chip companies.
Its inventor, Michael O'Higgins' mind-set was that blue-chip stocks have maintainable dividend payouts. According to his theory, this means a high yield is more likely a reflection of a low point in a company's business cycle than a sign of a declining dividend payout. On this basis, O'Higgins suggested buying the ten constituents of the Dow Jones that had the highest yields.
Utilising a screening tool and data supplied by Morningstar here is a list of the top yielding stocks amongst the 50 largest stocks listed on the ASX:
- Worleyparsons Limited (ASX: WOR): yield 7.82%
- Fortescue Metals Group Limited (ASX: FMG): yield 7.46%
- DUET Group (ASX: DUE): yield 6.74%
- Woodside Petroleum Limited (ASX: WPL): yield 6.37%
- Insurance Australia Group Ltd (ASX: IAG): yiled 6.09%
- Suncorp Group Ltd (ASX: SUN): yield 6%
- AusNet Services (ASX: AST): yield 5.89%
- Spark Infrastructure Group (ASX: SKI): yield 5.75%
- Spark New Zealand Ltd (ASX: SPK): yield 5.67%
- Scentre Group Ltd (ASX: SCG): yield 5.26%
The Dogs of the Dow theory appears to hold some merit based upon historical performance and given the enormous demand for high yielding stocks at present.
Only a starting point
Screens such as this one can provide a great starting point, however, care needs to be taken.
Firstly, it's important to look forward, not backwards when investing so before building a "Dog" portfolio, consider the outlook for future dividend expectations.
Secondly, it's preferable to compare yields on a grossed-up basis as this will account for differing levels of franking, thereby providing a more accurate comparison.