Try this effective trade play

In preparation for next year, with the market still expected to move north, you may want to consider the simple investing system I already wrote about not too long ago, but this time tweaked by a friend.

His concept was a variation of the so-called “Dogs of the Dow” investing strategy popularized by Michael Higgins in his book, Beating the Dow. It involves selecting 10 of the 30 companies in the Dow Jones Industrial Average (DJIA) with the highest dividend yield at the beginning of the year .

In the case of my friend, he picked 14 stocks, 13 of which are dividend-paying (though not exactly all with high yields) in the 30 component stocks of the benchmark Philippine Stock Exchange index (PSEi) and one dividend-paying yet non-index stock.

Instead of buying in January, he took his time up to the last week of March to enter the market. Timing, according to him, is strictly a judgment call.

If you bought in January as recommended, that would just be fine. You will notice that the market’s general price was just moving sideways.

My friend’s holdings consisted of: Philippine Long Distance & Telephone (TEL), San Miguel Corporation (SMC), Universal Robina Corporation (URC), Megaworld Corporation (MEG), SM Prime Holdings, Inc. (SMPH), Ayala Land, Inc. (ALI), Ayala Corporation (AC), Alliance Global Group, Inc. (AGI), SM Investments Corporation (SM), Metropolitan Bank and Trust Company (MBT), BDO Unibank, Inc. (BDO), Bank of the Philippine Islands (BPI), Manila Electric Company (MER) and Nickel Asia Corporation (NIKL).

Bottom line spin

The “Dogs of the Dow” model is simple. At the end of every year, you are to review the performances of the 30 component stocks of the DJIA. Determine which one has the highest dividend yield (for simplicity, divide the company’s dividend per share by the current stock price per share). Adjust your holdings yearly using the same criterion. This would mean that some of your former holdings may be replaced by other stocks that did better for the year.

The theory behind the model is that blue chip companies do not alter their dividends to reflect trading conditions. Therefore, the dividend is a measure of the average worth of the company.

In the meantime, stock prices fluctuate throughout the business cycle. This being the case, companies with high dividend yields are said to be “near the bottom of their business cycle and are likely to see their stock prices increase faster than low-yield companies.”

As such, this will mean that your investment selection may be confined not across the board, but only to a number of sectors of the market.

This happened in my friend’s case. He is ending the year at a comfortable rate of return above last Friday’s market average of 21.4 percent.

My friend did not wait until the end of the year to exit the market. Mindful of the Securities and Exchange Commission’s (SEC) rules on the publication of information, I discreetly mentioned that he was about to sell as early as the first week of November—again, on the basis of his judgment of the market.

In winning, 70 percent is still attributed to a good grasp of market psychology. With this kind of skill alone, you are already way ahead of other players.

My friend’s case affirms, too, that the exits matter in making money. Without the right exit, you could lose profits that are already there.

Be that as it may, exiting now will not be bad at all. You could still make a good save of profits. The market is bouncing back.

One important thing to remember, though, the “Dogs of the Dow” model is strictly a long-term type of investing. It needs patience and discipline. If you are too fickle-minded or easily agitated, a short-term investing strategy might be better for you. However, while short-term investing models are equally good, they are too demanding in time and emotional resource.