Can You Beat the SP 500 by Investing in Underperforming Stocks?

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Investing in undervalued stocks that are on the verge of reversing their downward trend can be a lucrative strategy that consistently outperforms the SP 500. This article explores a few effective methods to identify and invest in such opportunities.

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The Dog of the Dow Strategy

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The ‘Dog of the Dow’ is one such strategy that has garnered attention for its consistent performance. This method involves selecting the 10 highest dividend-yielding stocks from the Dow Jones Industrial Average (DJIA), a market index composed of 30 large-cap companies that are well-known to investors.

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These companies often have high dividend yields due to their lower stock prices, effectively putting you at the bottom third of the DJIA based on the previous year's performance. The rationale behind this strategy is that these large companies, despite their past underperformance, have the resources to turnaround their performance.

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Dividend Income and Market Recovery

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By investing in these stocks, you can benefit from the dividends while waiting for a market recovery. This makes the ‘Dog of the Dow’ strategy particularly suitable for investing during market downturns, as the strong fundamentals of these companies provide a safety net for your investment.

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Current Composition of the Dog of the Dow for 2024

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The list of the ‘Dog of the Dow’ for 2024 includes some familiar names, such as:

r r Verizonr 3Mr Dow Chemicals (not the index)r Walgreensr Chevronr IBMr Coca-Colar Ciscor r r

These companies are known for their dividend yields and strong financials, making them a solid choice for investors looking to capitalize on market swings.

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Alternative: Small Dogs of the Dow

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For those looking for a slightly more aggressive approach, the ‘Small Dogs of the Dow’ is an alternative. This strategy involves selecting only the 5 highest dividend-yielding stocks from the DJIA, which often provides slightly better returns.

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The advantage of this approach is that you have a more concentrated portfolio, which can potentially deliver higher returns but with increased risk. The downside is that you risk missing out on broader market trends, and specific companies like IBM, which consistently appear on the list, may not see significant improvements in their performance.

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Consistency and Performance

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Over the years, the ‘Dog of the Dow’ strategy has shown consistent outperformance of the overall market. This is due in part to the historic resilience of the selected stocks, which can weather market downturns thanks to their strong fundamentals.

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Practical Considerations

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When implementing this strategy, it's important to consider the following:

r r Diversification: While a diversified portfolio is generally recommended, focusing on high-dividend yielding stocks can help manage risk during market downturns.r Regular Monitoring: Keep a close eye on the performance of the selected stocks to ensure they continue to meet the high-yield criteria and the broader market conditions.r Long-term Perspective: This strategy is most effective when viewed from a long-term investment horizon, allowing time for the selected stocks to recover and demonstrate their potential.r r r

Conclusion

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Investing in undervalued stocks, such as those chosen through the ‘Dog of the Dow’ strategy, can offer a way to outperform the SP 500. By leveraging high-dividend yields and taking advantage of market recovery, investors can build a robust and resilient portfolio. However, as with any investment strategy, it's essential to conduct thorough research and consider personal financial goals and risk tolerance.