Observant Reader Nips ‘Dow Dogs’ List

Is one of the stocks in the Chicago Board Options Exchange’s “Dow Dogs” the wrong breed?

A Times reader, Ronald A. Haw of Culver City, took issue with the CBOE’s list of the 10 highest-yielding Dow Jones industrial stocks--the so-called dogs of the Dow--when he saw it in the paper recently.

The list, which the CBOE compiled at the end of 1998 for its option contracts that follow the Dow Dogs strategy--buying the most out-of-favor Dow stocks, as indicated by the highest dividend yields--included International Paper.

Wrong, says Haw: Exxon’s yield--annual dividend divided by share price--was 2.24% at the close of trading on Dec. 31, edging International Paper’s 2.23%.

Asked about the discrepancy, a CBOE spokeswoman said she was unaware of any complaints or other inquiries. “I can’t believe anybody’s looking at it that closely,” she said.

One reason for the lack of whining may be that International Paper has pummeled Exxon in stock performance this year, giving the CBOE’s Dow Dogs a boost, intended or not. IP is up 19.3% year-to-date, versus Exxon’s 7.3% gain.

The most basic Dow Dogs strategy calls for buying the 10 highest-yielding Dow stocks at the end of each year and holding them for one year. Historically the strategy has beaten the market, though in recent years it has fallen flat.

Though the CBOE’s investment brochure for its Dow Dogs options says the components are “as of Dec. 31,” a researcher who helped compile the portfolio acknowledged that the stocks were picked Dec. 28. He said the CBOE chose the stocks a few days early because it was required to notify the Securities and Exchange Commission of the portfolio’s composition before launching the offering Jan. 1.

Should only a purist care about 1/100th of a percentage point in yield?

Other companies selling mutual funds and other investments tied to the Dow Dogs split on the IP versus Exxon issue.

The Payden & Rygel Growth and Income Fund used Exxon for its January Dow Dogs portfolio, based on the Dec. 31 market close. But Nike Securities, which runs First Trust Target 10, a unit investment trust based on the Dow Dogs, used International Paper for the January version of its portfolio.

Both companies rebalance their portfolios monthly as needed, updating with the newest Dow Dogs.

Meanwhile, The Motley Fool--an educational Web site (https://www.fool.com) that features pages on the Dow Dogs--used Exxon for its 1999 “High-Yield 10,” as the basic dogs are sometimes called.