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made investing in the Dow 30. For instance, a web site dedicated to this strategy
(dogsofthedow.com) claims that you would have earned 17.7% a year from 1973 to 2002
investing in the ten highest dividend yield stocks in the Dow, a much higher return than the
11.9% you would have made on the rest of the Dow.
Not only is this comparison an extraordinarily narrow one – after all, there are
several thousands stocks that are not part of the Dow - but it can be misleading. Many of
the Dow Dog stocks are riskier than the rest of the Dow 30 stocks, and the higher returns
they make could be just compensation for the higher risk. In addition, any investor investing 21
over these stocks over the periods covered (the sixties and the seventies) would have faced a
substantial tax liability from the high dividends. It should come as no surprise that those
studies that do control for the risk differences and factor in the tax effects conclude that the
superior performance of the Dow Dog stocks is a mirage.4
Perhaps, the best test of a strategy is to look at the stocks that would be picked
based upon the strategy and ask yourself whether you would...
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- Spring '11