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Chapter 12. Managing Your Investments > Dogs of the Dow: Top 10 Dividend-Paying...

Dogs of the Dow: Top 10 Dividend-Paying Stocks

Among the various investment theories, there is a very interesting one called the Dog of the Dow. First introduced in the 1992 book, Beating the Dow (Michael O'Higgins and John Downes, HarperCollins Publishing, 2000), the theory behind the Dogs of the Dow is that if you buy the highest-paying dividend stocks in the Dow Jones Industrial Average, you are getting two possible advantages. First, you're getting the dividend yield on blue chip stocks, which can serve as a very safe and attractive alternative to bonds or bond funds. Second, you get the added possible upside of a stock that is likely undervalued by the market (that's why they call them the dogs).

To fully grasp this concept, you have to understand the relationship of dividends to price. As a stock price falls, the dividend usually remains the same, so the dividend expressed as a percentage of the share value goes up. The further the stock drops, the more the dividend yield grows. If you buy the stock at a trough (the low point), you get the highest dividend yield and the upside potential if the stock recovers.


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