In order to follow this formula, all an investor really has to do is purchase an equal amount of the highest yielding stocks in the Dow each year.  There are, however, a few variations to this formula.  An investor might find that selecting the five lowest prices of the “Dogs of the Dow,” or purchasing the four highest priced.  With strong past performance records, many investors have been known to jump on the “Dogs” bandwagon.

The popularity of this practice in dealing with highest yielding stocks leads to criticism and accusations of data mining, a process of testing stock picking methods against record to find an approach.  For every one hundred tested methods, merely a handful of winners are found by chance and they are nothing more than statistical fossils, unlikely to be profitable later on. 

The varying “Dogs of the Dow” approaches seem to follow a data mining pattern.  They start out with the highest yielding stocks and move into refining them.  A variety of tests can be used to detect data mining.  However, the most simple of all is to merely keep an eye out for strange parameters.  For example, picking the highest yielding stocks makes sense, but picking stocks based on price-per-share?  The price of stock alone does not represent anything about the company.  Weird criteria can be explained away.

If an approach is good, it should stand the test of time. Occasionally, the highest yielding stocks will have lackluster performance, as there is an increased risk that they will cut their dividend.  Dividend yield is based on the last year’s dividend divided by current stock price.  If a company falters, its stock price drops incredibly, pushing up the apparent dividend yield.  Investors of highest yielding stocks should make sure that a company earns more than enough to cover its dividend and that it is likely to do so in the future. 

Another reason for poor performance of highest yielding stocks is certain over-represented sectors.  

A strategy of picking highest yielding stocks can provide a performance boost but the pickings may be extremely limited. Moving away from the highest yielding stocks, or diversifying across many industries, looks like a better strategy.   These stocks are more likely to have well-covered dividends and may experience growth.  It is important to avoid being too greedy when it comes to highest yielding stocks and elaborate strategies.