Principles of Formation of the Dividend Portfolios on the Russian Stock Market

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First of all, the portfolio of stocks of the particular companies, which demonstrated the highest dividend yield in the previous year, is constructed. All the chosen stocks have an equal weight in the portfolio, while the number of stocks and the month of the portfolio revision can be optimized during the process or testing. At the second stage, the return on this portfolio must be fixed at the end of the year. Then, the portfolio should be rebalanced in accordance with the fact of which companies had the highest dividend return during this holding period. At the final stage, this procedure is repeated for 16 years. Then, an average return on the DoDs portfolio must be compared with an average return on the market index (MICEX).

The next theoretical study which is necessary to be used in the investigation is «Conceptual Paper of the Trading Strategy: Dogs of the Dow Theory (DoD)» written by Siti Hajar Nadrah Mohamad Ghouse and Noryati Ahmad (2015)2. This paper focuses on understanding the mechanisms of modeling various trading strategies and their evolution from initial ideas to complicated models. The authors also provide a description of Dogs of the Dow trading strategy.

The next article which I would like to refer to is called «Can Alternative Dogs of the Dow Beat Hedge Funds?» written by Julian J. He in 2014. The author claims that it is possible to construct at least one long-short portfolio which could outperform the hedge fund benchmark. Using the approaches such as out-of-sample and in-sample tests, the author proved that the investor can surpass hedge fund returns by modeling the portfolio as a mix of the momentum, growth, value, reversal, constraint and beta policies.

At the next stage of the research it would be rational to investigate the efficiency of the DoDs strategy not only on the Russian market, but also in other countries. According to this goal, it would be rational to refer to the article «Empirical analysis of the Dogs of the Dow strategy: Japanese evidence»5 written by Mingyue Qiu, Yu Song and Masayoshi Hasama at the end of 2013. In this recent study the comparison of the returns on investment in Japanese NIKKEI 225 index and Dogs of the Dow strategy is presented. The fact that Dow Dogs strategy can outperform NIKKEI 225 during the period from 1981 to 2010 was proved by using different statistical methods. The authors also underlined that the DoDs strategy provides better results in the long-term period.

On this slide you can see an average annual returns on the portfolios with different number of shares in the portfolio, which were calculated during this research. As we can notice, The return on investment in the author’s model exceeds the market return. So, it is possible to outperform the market by using the Dogs of the Dow passive investment strategy, when the portfolio consists of 3,5,7,10 stocks.

The best month for the portfolio rebalancing is October.

So, we can conclude that the author’s hypothesis that the Dogs of the Dow strategy is efficient on the Russian stock market can be confirmed.