The essential idea behind the strategy is that among the 30 stocks that make up the Dow Jones Industrial Average, some will be represent a better value relative to the others and to the market has a whole. The key tool in selecting these stocks is the dividend yield (the annual dividend payment dividend by the current price of the stock expressed as a percentage). The theory is that those stocks in the Dow with the highest yields are a good value and a relatively safe investment. The Dow consists on stocks that are generally acknowledged to be "blue chips," which means they are large companies with long histories and are virtually certain to stay in business for the foreseeable future. These characteristics provide a degree of safety in comparison to high flying new issues. The value approach as measured by dividend yields will usually mean that those Dow stocks that might be considered "growth" stocks (Coca-Cola, Disney, and McDonalds, for example) are unlikely to be purchased using strategies based on relative dividend yields.
The strategies usually start with identifying the ten Dow stocks with the highest dividend yields. While this can be done at any time, most often the evaluation is performed at the close of the last trading day of the year. There is some evidence that this is the best time; see my research page for details. All ten of these stocks could be purchased and held for a year, which is one of the suggested strategies, but often other considerations, such as the price per share, are employed to narrow the list further. Some of these, which have been published in books are discussed below. All of the books provide data on how the strategies would have performed over the past 20 or more years. These books are still in print, may be available at bookstores with a good selection of investing books, and should be in public libraries. For convenience, these and other books can be ordered on-line from Amazon.com Books from my investment books page.
O'Higgins and Downes, "Beating the Dow": This book was published in 1991 and a paperback edition came out in 1992, which is still available in bookstores. They advocated buying the five stocks in the list of the ten highest yields that have the lowest price per share. The book provides background on the companies in the Dow, some of the history of the Dow, and discusses some alternative strategies. One of these, a single stock strategy for those who want to put all their eggs in one basket, would buy the second lowest priced stock of the ten with the highest yields. They call this stock the Penultimate Profit Prospect (PPP). While the purchase of the PPP each year would produce outstanding returns on the average over the years (see my research page for more information), in some years this stock goes down a lot. My feeling is that investing in just one stock is too risky for most investors and is contrary to the underlying philosophy of investing in Dow Stocks. The choice of the second lowest priced stock may seem a bit strange, but the authors claim that the lowest priced stock may be a troubled company that should be avoided.
Knowles and Petty, "The Dividend Investor": Published in 1992 as a paperback. Their basic recommendation is the purchase of all ten of the highest yielding Dow stocks each year. As an alternative, they suggest buying the five highest yielding stocks, which produces a higher average return than the ten, but with greater variability. Buying the five lowest priced rather than the five highest yields, as O'Higgins and Downes suggest, provides a higher average historical return. The research page has specific values. This book has data back to 1957, about 15 years more than the other two books.
David and Tom Gardner, "The Motley Fool Investment
Guide": Published as a hardback in 1996 (but I would not
be surprised to see a paperback edition in the near future) this
irreverent book is not primarily about the Dow dividend strategy.
I recommend the book for the authors' independent "Foolish"
(which is better than "Wise") approach to investing
and youthful exuberance (they obviously have not experienced a
bear market). Picking up on O'Higgins and Downes, they advocate
using the five lowest priced of the ten highest yielding Dow stocks,
BUT 1) not buying the lowest priced one, and 2) doubling up on
the PPP, which is the second lowest priced stock. That means investing
40% of the capital in the PPP and 20% in each of the third through
fifth lowest priced stocks on the top ten yield list. While this
tests out well on the historical data, I think the method is a
bit contrived and puts too much faith in the PPP. I am suspicious
that the PPP is an example of finding an investment rule that
works on the historical data but is not supported by a sound logical
reason why the rule should work. The Gardners call their version
of the Dow Dividend Strategy the Foolish Four. The strategy and
current results appear on their web site. The is a link to that
site on my Investing Page.