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Dogs Of Hang Seng: Investing In The Top 10 Dividend Yielding Constituent Stocks

A passive approach to active investing.


There are many types of investment strategies that you can adopt to grow your portfolio. Depending on the stage of the market cycle, different strategies such as value, growth, and income may perform better than others.

One such approach that we shall examine in this article is the Dogs of Dow, a contrarian dividend-based strategy. Even though this strategy was first used with the US Dow Jones Index (DJI), we will adapt it to the Hong Kong Stock Exchange (HKEX) and the Hang Seng Index (HSI), which measures the performance of the market.

This dividend-based strategy can help to boost your returns, especially in a volatile market. Read on to find out how you can identify the Dogs of the Hang Seng and execute this strategy.

What Is The Initial Dogs Of Dow Strategy About?

The “Dogs of the Dow” is a stock investing strategy that was popularised by Michael B. O’Higgins in his book titled “Beating the Dow”. Published in 1991, the book explains how investors can beat the Dow Jones Index (DJI) by investing in a portfolio of 10 Dow component stocks with the highest dividend yields.

These 10 Dow stocks that give the highest dividend yields to their price are referred to as the “dogs”. At the end of each year, you would need to rebalance your portfolio to maintain equal exposure to the top-10 dividend Dow stocks.

Dogs Of The Dow Is A Contrarian Dividend-Based Strategy

The Dogs of Dow are selected based on a small universe of 30 constituent stocks in the Dow Jones Index. These blue-chip companies are assumed to be more well established and less likely to go bust compared to other smaller listed companies. Nevertheless, they are not spared from the normal business cycles of expansion and contraction.

Furthermore, it is assumed that many of these blue-chip companies will either maintain or increase their dividends over time. The higher dividend yields, which are caused by falling stock prices, could be a result of either underperformance or a lack of buyer interest. But, as these stocks recover, it will lead to an overperformance as markets revalue them properly.

In other words, the strategy relies on mean reversion, which assumes that stocks can be over or undervalued in the short term but will revert to the mean over the long run.

Key Indicator: The Dividend Yield

Hence, whether a company is growing or shrinking will have an impact on its stock price, which usually rises in an expansion and falls in a contraction. The Dogs of the Dow strategy uses the dividend yield to identify the companies that are in the contraction phase to invest in now, in hopes of selling them for a profit later during the expansion phase of the business cycle.

Read Also: Guide To Dividend Investing In Singapore

Performance Of Dogs Of Dow

According to the book’s authors, the Dogs of Dow (Dogs) strategy generated a cumulative profit of 1,753.14% compared to the Dow Jones Index return of 559.31% (not including commissions and taxes) from 1973 to June 1991. This is equivalent to a 16.61% annualised return for the Dogs versus 10.43% for the DJI.

However, in recent years, the performance of the Dogs has not fared as well as before. From 2000 to 2020, the Dogs generated a 128.70% return, while DJI returned 142.50%. Here’s a breakdown of the yearly performance over the past 20 years.

Historical Performance
Year Dogs Of Dow DJI
2020 -12.60% 7.20%
2019 15.50% 22.30%
2018 0.00% -3.70%
2017 19.40% 25.10%
2016 16.10% 13.40%
2015 -1.20% -2.20%
2014 7.00% 7.50%
2013 30.30% 28.10%
2012 5.70% 7.30%
2011 12.20% 5.50%
2010 15.50% 11.00%
2009 12.90% 18.80%
2008 -41.60% -33.50%
2007 -1.40% 6.40%
2006 30.30% 19.10%
2005 -5.10% 1.70%
2004 4.40% 5.30%
2003 28.70% 28.30%
2002 -8.90% -15.00%
2001 -4.90% -5.40%
2000 6.40% -4.70%

 

Nevertheless, the Dogs are performing better than the DJI in 2022.

Index Description Yield Change
Dogs of Dow 10 highest yielding Dow stocks on 12/31/21 4.60% -9.6%
Dow Jones Dow Jones Industrial Index 2.23% -14.3%

*Changes do not include for dividends, commissions, or taxes.
Source: DogsoftheDow

Here are the Dogs of Dow for 2022 if you are interested in tracking their returns.

Stock Name Symbol Dividend Yield (%)
(as of 31 Dec 21)
Dow DOW 4.94
Verizon VZ 4.93
IBM IBM 4.91
Chervon CVX 4.57
Walgreens WBA 3.66
Merck MRK 3.60
Amgen AMGN 3.45
3M MMM 3.33
Coca-Cola KO 2.84
Intel INTC 2.70

Drawbacks Of The Dogs Of Dow Strategy

No one strategy is perfect and will have some underperformance in certain years. In that respect, the Dogs of Dow is no exception, and it has its flaws too.

For one, while the Dogs have outperformed the DJI in certain periods, it has also performed noticeably worse in years of market corrections. For example, in 2008, the Dogs lost 41.6% while the DJI lost 33.5%, and in 2020, the Dogs lost 12.6% while the DJI generated a positive return of 7.2%.

The second drawback of the Dogs strategy is its focus on just 10 companies on the DJI. This might not give investors adequate diversification to lower their risks.

The third drawback is that the returns might be close (or worse, less) to the average market returns and lower than using other strategies like growth investing. Based on the past 20 years of historical returns, we may not get the same outsized returns as per the lookback period used by the book’s authors.

The fourth drawback is the 30% dividend withholding tax that Singapore investors will be charged on all dividends received from US-listed companies. Hence, this could make it less profitable to use this strategy in the US markets overall.

Dogs Of Hang Seng

This strategy can be used on either the Singapore or Hong Kong stock exchanges as well, as these two countries do not charge tax on dividend income.

But for our article, we have chosen to use the Hong Kong stock market as it offers wider diversification and also provides relatively high dividend yields. The Hong Kong Stock Exchange (HKEX) has a market capitalisation of around USD $35 billion (as of August 2022) and hosts over 2,500 listed companies. It is a popular way for investors to get into Chinese companies, including household tech names like Alibaba, Tencent, and Meituan.

To execute the Dogs strategy, investors can use the top 10 dividend-yielding stocks in the Hang Seng Index (HSI), which is made up of 69 stocks and represents over 60% of the market capitalization.

Based on August 2022, these are the top 10 constituent stocks that have the highest dividend yields. You may also wish to expand your portfolio to include more than 10 stocks, as unlike the Dow Jones, which has 30 stocks, the HSI has 69 stocks.

Stock Name Symbol Dividend Yield (%)
(as of 31 Dec 21)
New World Development 00017 6.68
Sinopec 00386 6.56
China Overseas 00688 6.39
China Construction Bank 00939 7.06
China Mobile 00941 7.03
Hengan 01044 7.66
ICBC 01398 7.35
Country Garden 02007 7.83
Bank of Communication 03328 8.01
Bank of China 03988 8.34

Source: HongKongDividendStocks

Read Also: Hang Seng Index Vs Hang Seng TECH Index Vs Hang Seng ESG 50 Index: Which Has Been The Best (Worse) Performing ETF In 2022?

Step-By-Step Guide To Executing The Dogs Of Hang Seng

To get the dogs of the Han Seng, simply follow these three steps:

Step 1: Identify the 10 highest dividend-yielding HSI index stocks.

On the last business day of each year, sort the highest dividend-yielding stocks from the Hang Seng Index. You could also get the list by using a stock screener.

Step 2: Invest evenly among the 10 dogs (or more) and hold for the following year.

On the first trading day of January, take the total amount that you’re investing and invest 10% in each of the 10 stocks. If you’re investing $10,000, then you would have $1,000 in each of the stocks. For a $500 total investment, that’s just $50 per stock.

Step 3: Reallocate your portfolio as per Step 1 at the end of the year.

After holding the stocks for a year, repeat the process by starting again at step one by identifying which companies make the new list. Next, you would need to reallocate your portfolio by selling stocks that no longer appear on the list and replacing them with any new ones that do.

Remember to stick to the strategy over a long period before judging the performance of the strategy, as all strategies will have short-term blips.

Read Also: 9 ETFs You Can Invest For Exposure To The China/Hong Kong Market

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