Does the 'Dogs of the Dow' strategy work for HK equities?

January 04, 2019 12:20
'Dogs of the Dow' investing strategy has worked well in the US in 2018, helping limit the losses amid a broad market slide. Photo: Reuters

'Dogs of the Dow' has been a rather popular strategy with US equity investors. Let's see if the strategy, which calls for purchase of laggard blue-chips with the highest dividend yields, works when applied to Hong Kong shares.

As a rather simple stock-picking strategy, it is easy to execute and has generated better returns in the US than the benchmark Dow index from time to time.

In practice, investors only need to pick the 10 index constituent stocks that pay the highest dividend at the beginning of a year to form a portfolio and hold them for next 12 months. And then repeat this process year after year.

The concept that lies underneath is this: selecting stocks with low valuations, assuming that over time they will catch up with the broad market to produce outperforming return.

Applying it to Hong Kong, we have used 2018 data to back-test the performance.

In addition to picking the top 10 dividend-paying stocks among the Hang Seng Index components, each with a 10 percent weighting, we have included stop-loss mechanisms.

If stocks in these portfolios slump over 15 percent below the cost, the stop-loss mechanism will kick in. There is also a trailing stop limit, if the share price drops 15 percent from a peak level.

This portfolio generated a loss of 1 percent last year, better than the 10.1 percent loss posted by the Hong Kong Tracker Fund (02800.HK) over the same period.

However, such strategy may not work that well in longer periods of time.

For example, if the time frame stretches longer to cover 2006-2018, the strategy provides an annual return of 5.4 percent, against 7.7 percent return of the Tracker Fund in the same period.

The full article appeared in the Hong Kong Economic Journal on Jan 3

Translation by Julie Zhu

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Hong Kong Economic Journal chief economist and strategist