Comparison of Dog’s of the Dow Strategy

Investors always try to find the ways to beat the market. In recent years, one popular strategy among International investors involves a portfolio comprising of the ten highest yielding stocks selected from among the KSE all share index stocks in the Karachi Stock Exchange-KSE, (one of the most popular stock indices of the Pakistan). Such portfolio based on the Dow Dividend Strategy (DDS) came to be known as the 'Dogs of the Dow.' Portfolio of 'Dogs of the Dow' has been found to outperform the Dow on numerous occasions. The proposed study will extend the well documented Dogs of the Dow (Dow Dogs) strategy to Pakistan stock market. Purpose of this research is to compare the impact of DoD(KSE) portfolio performance with other developed and underdeveloped countries. The result shows that Pakistani Stock market faces the same external conditions like other developed and under developed countries. In conclusion, the Dogs of the Dow strategy can be a successful investment strategy in the Pakistani market but with some limitations.


Introduction
Investors participating in markets, whether it is trading commodities, fixed financial gain instruments, real holding, or fairness securities, all share the similar goal of achieving the highest rate of return for their tegument while accumulation themselves to the last-place even of essay. To reduce or choose the level of risk capitalist expose themselves to and better finance returns, over indication investors have Devi a variety of different form and methods to help improve or manipulate their investment returns. An example of these models is an investment strategy that has been used for trading justness securities in the United Express known as the "Fella of the Dow" investment strategy.
The DoD is an investing strategy which was introduced in 1991 by O'Higgins in his book, Beating the Dow. This is a strategy in which top ten yielding stock is purchased for the period of one year. (Chinmoy &Sahu, 2001).
One theory, which purports to beat the market, is the "Dow Dog" theory. This theory states that an investor should pick a day, a birthday, some anniversary or the end of the calendar year, and purchase a portfolio consisting of the top ten yielding stocks which is listed in the DJIA. One year later, portfolio would be restructured by selling the stocks that are no longer in the high yield group and replace them with stocks that are.To draw factual conclusion the following two hypotheses is tested: H 1 : DoD strategy is as beneficial for KSE/Pakistani investors as for other developed markets.

Literature Review
In United States of America USA the popular newsletter Beating the Dow and Barrons's" began following the system on a regular basis popularizing the term "Dogs of the Dow(O'Higgins et al 1999). Will Roger (an American investment expert) said that people should be more concerned with the returns of their principal than the return on their principal. That observation sums up today's out of control attitude towards the stock market. Consider the following: In July 1996, a federal commission on the long-term future of social security, driven by a need for higher returns to meet projected deficits, and to bolster warning public confidence in our nations principal retirement system, issued recommendations ( Mc Carry et al 1999).
In the Korean market the relationship between dividend yields and stock returns was examined. Korean market provided some implications and institutional features that differ from United States and other countries. (Jinwoo et al, 2008) In Finland, DoDstrategy was examined by ICE-CAPITAL Securities Ltd in 2010. The empirical findings suggests that this investment strategy is profitable in Finnish market.(Eemli Rinne, 2011).
This strategy was also applied to the markets in Canada. This was in the form of high-dividend-yield strategy to the Toronto 35 Index. Their results showed that the strategy produced higher risk-adjusted returns than the Toronto 35 index. (Sue Visscher et al, 2003) If we look around the world and put a glance on USA which is the birth place of this strategy. It'll be worth full to discuss the work of Michael chemens(2012). He examined the dividend investing strategy for long term outperformance in USA famous indexes and in all over the world. By providing very significant charts, he concluded that dividend strategies looked some for time period with losses, which added a significant utility to investor experience. The outperformance of high dividend yields stocks has been strong over 1928-2011 time frame. Since the basic returns for this outperformance are more behavioral in nature than institutional. He also said that chance says history will repeat itself.
Like other different countries of the world China our neighbor country also tried this strategy on their stock market. Caral Wang et al(2011) investigated that why DoD strategy barks loudly in China. They analyzed the cross-sectional variations in the magnitude of the predictive power of Dow Dogs strategy in Chinese stock. They concluded that behavioral factors drive superior predictive power of Dow Dogs Strategy. Market inefficiency comes from investors irrationality and herding behaviors which in supported by behavioral hypothesis.
It can be proved through evidences of research from Polland. Janusz Brzeszynski (2007) analyzed the profitability of an investment strategy focused on high dividend yield stocks from the polish market according to Dog's of the Dow theory concept author have constructed a portfolio of Top ten highest dividend yielding companies. By using T-Statistics and dividend yield it was concluded that the portfolio containing 10 best and highest dividend yield stocks were been able to beat the Polish market but not consistently.
Dale L. Domian et al. (1998) discovered the rise and fall of the " Dogs of the dow strategy. They analyzed the data of American index during 1973-1992. The main objective of the study was to demonstrate the behavior of stocks consistent with market overreaction. It was concluded by them that dow dividend strategy is no longer selecting the true dogs.

Research Methodology
In this paper, we propose applying the "Dogs of the Dow"investment strategy to the KSE, which is the principal stock exchange in the country and compare its performance with other three stock markets of developed and developing countries. As of 31 December 2012, the KSE had about 600 listed securities.The most popular market index for the Pakistan stock market is the KSE-100 Index, which is calculated from the prices of allcommon stocks (including unit trusts of property funds) on the main board of the KSE, except for stocks that have beensuspended for more than one year. The index is a marketcapitalization-weighted price index, which compares thecurrent market value of all listed common shares with itsvalue on the base date. Here we apply the "Dogs of the Dow" strategy to the KSE-100 index, which is "calculated from the stock prices of the top 100 listed companies on KSE in terms of large marketcapitalization, high liquidity and compliance withrequirements regarding the distribution of shares to minor shareholders". Two equations are used for calculating dividend yield and total return of stock market and top ten companies for each year. This calculation is practiced for all other three indexes as well.
Where; R= return Pt= Current price Pt-1= Previous market price Dy= Dividend yield D0= Current paid dividend Above metioned two equations are used for calculating total stock return and dividend yield. Log is used for calculating market return of all indexes.

Data Analysis
The data of three other foreign indexes, which are standard

Findings and Conclusions
The While analyzing the whole data it is suggested that investor should be advised by a professional investment guide before implementing DoD strategy.
As the result shows potential of outperformance by all indexes except S&P during 2002-2005. It is not decisive evidence that for a long time period strategy DoD will outperform.
January-December data is taken here in this study, annual modification for six, eighteen, or twenty four months may give different results. For further research work allowance for tax capital gain and dividend can be made.