"Dogs of the Dow" investment strategy: Does it hold in New Zealand

Abstract

The "Dogs of the Dow" investment strategy involves investing in the 10 highest dividend yielding stocks in the DJIA at the beginning of each year. In this paper we examine the performance of the "Dogs of the Dow" strategy in the New Zealand stock market over the 11-year period, 1992-2002. Our findings suggest that implementation of the strategy leads to the portfolio consistently underperforming the NZSE Gross Index by a significant amount on an absolute and risk-adjusted basis. Furthermore, the portfolio returns remain relatively poor during rising and falling market/ dollar subperiods. This appears to be due to the majority of the stocks in the portfolio exhibiting downward momentum in the year prior to inclusion in the portfolio. The continuation of this strong price depreciation leads to poor stock price performance. Thus our results support the findings of Asness (1997), that dividend yield as a predictor of stock returns does not work for firms with high momentum.