Dogs of the Dow and Dogs of Nifty: meaning and how the method works

Some investing methods use simple, fixed rules instead of forecasts. The Dogs of the Dow is one of the most famous. This page explains how the method works, how people apply the same idea to the Nifty 50 and what its limits are.

Quick answer

The Dogs of the Dow is a rules-based method where an investor buys the 10 shares with the highest dividend yield in the Dow Jones Industrial Average at the start of each year, in equal amounts, and repeats the process a year later. 'Dogs of Nifty' applies the same rule to the Nifty 50 in India. The idea is that a high yield may point to a share that is out of favour.

Key takeaways

• The method picks the 10 highest dividend yield shares in an index.
• Equal amounts are invested and the list is reset each year.
• It was made popular by Michael O'Higgins in 1991.
• Dogs of Nifty uses the same rule on the Nifty 50.
• A high yield can also signal real business trouble.

What is the Dogs of the Dow method?

It is a simple yearly routine. At the start of the year, you list the shares in the Dow Jones Industrial Average, a US index of 30 large companies. You rank them by dividend yield and pick the 10 with the highest yield.

You put an equal amount of money into each of the 10 shares and hold them for one year. At the next year start, you repeat the ranking and adjust the list. Michael O'Higgins made the method popular in a 1991 book.

Why focus on dividend yield?

Dividend yield is the yearly dividend divided by the share price. When a share price falls but the dividend stays the same, the yield rises. So a high yield can point to a large, established company whose shares are out of favour for now.

The thinking is that such companies may recover over time. This makes the method a simple form of contrarian investing, built on the idea that today's unpopular large companies may not stay unpopular forever.

What is Dogs of Nifty?

Dogs of Nifty is the Indian version of the same idea. An investor ranks the 50 companies in the Nifty 50 by dividend yield, picks the 10 with the highest yield, invests equally and resets the list once a year.

Dividend payout habits differ between countries. Some Indian companies, such as certain public sector firms, pay high dividends as a policy, so the list may lean towards particular sectors.

What are the limits of this method?

A high yield is not always a bargain. It can mean the market expects the dividend to be cut because profits are falling. Buying such a share only for its yield is sometimes called a 'value trap'.

The method also ignores debt, growth and business quality. It can be concentrated in a few sectors, and results vary a lot from year to year. Past performance is not indicative of future results, and dividends are not guaranteed.

The key point to remember

The Dogs of the Dow is a rule that picks high-yield shares from an index once a year. It is easy to understand, but it is not a complete strategy. Any decision should be your own, based on proper research.

The securities and commodities named here are mentioned only to explain how the market works and are not a recommendation to buy, sell or hold them.

Frequently Asked Questions