An Empirical Analysis of the Dog of the Dow Strategy for the Taiwan Stock Market

Abstract

Abstract-The Dog of the Dow investment strategy consists of buying the ten highest-dividend-yielding stocks in the Dow Jones Industrial Average in the American stock market and rebalancing the portfolio annually. The strategy is recognized as an effective method for portfolio selection in a lot of stock markets. In this study we apply the strategy to the Taiwan stock market (we name it Taiwan DoD strategy) and analyze its performance based on data from 2003 to 2012.We propose here to buy the ten highest-dividend-yielding stocks in the Taiwan 50 Index and rebalance the portfolio annually. We conducted a simulation and found that the Taiwan DoD strategy always had a higher accumulated return than the Taiwan 50 Index. We also compared the risk-adjusted returns and investigate the performance of portfolios with less number of stocks. Simulation results show that the Taiwan DoD strategy is effective.Index Terms-Dogs of the Dow strategy, investment strategy, portfolio selection, the Taiwan stock market, TAIEX, Taiwan 50 Index.

The Dogs of the Dow Theory – Is It Valid?

“…Many researchers have worked on the validity of the DoD theory, but with a lack of a strong consensus. Using data in Taiwan and Thai stock markets, respectively, Yan et al (2015) and Tissayakorn et al (2013) showed that the DoD strategy earned higher returns than the benchmark in each country. Soomro and Haroon (2015) also confirmed that the DoD strategy outperformed the benchmark in the Pakistani market, with some limitations.…”

Does the Dogs of the Dow Theory Work at the Sectoral Level?

“…However, there is no robust consensus on the validity of the theory in the market. Some have found the theory to be well confirmed (Chong & Luk, 2010;Tissayakorn et al, 2013;Soomro & Haroon, 2015;Yan et al, 2015), whereas other studies contradict the theory (Domian et al, 1998;Hirschey, 2000;Da Silva, 2001;Kim, 2019). Yan et al (2015) supported the validity of DoD theory by demonstrating higher returns upon following this strategy than the average market return in Taiwan.…”

“…Some have found the theory to be well confirmed (Chong & Luk, 2010;Tissayakorn et al, 2013;Soomro & Haroon, 2015;Yan et al, 2015), whereas other studies contradict the theory (Domian et al, 1998;Hirschey, 2000;Da Silva, 2001;Kim, 2019). Yan et al (2015) supported the validity of DoD theory by demonstrating higher returns upon following this strategy than the average market return in Taiwan. Using data in Pakistan, Soomro Haroon (2015) also showed that the DoD theory works well with some limitations applied.…”