The "Dogs of the Dow" Investment Strategy Testing in Emerging Capital Markets

This paper tests the performance of the Dogs of the Dow investment strategy, which gained its popularity two decades ago. The original strategy calls for investing the same amount of money in 10 stocks included in Dow Jones index. Selected stocks should have the highest dividend yield. Investor holds the portfolio for one year and then rebalances it applying the very same strategy. Many studies confirmed the hypothesis that the returns of the DoD portfolio exceed the benchmark returns. However, there are a lot of papers that undermine this hypothesis. This paper accumulates methods used in previous studies and examines the performance of different modifications of the DoD strategy in Russia and Brazil over the period 2005-2017. Portfolios vary in the number of shares and month of the portfolio formation. The results show that DoD strategy outperforms the benchmark on the risk-adjusted basis in both countries. This fact confirms the main hypothesis of the study – the ability of the DoD dividend strategy to outperform the benchmark. For Russian capital market the most effective portfolio was the one formed in December and consisted of 7 stocks. Results were statistically significant at the 5% level. For Brazilian capital market the best strategy was “small dogs”, but results were not statistically significant. Moreover, in Russian capital market month of portfolio formation shows significant influence on the excess return of the strategy.