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Dogs of the Dow and New Ideas for 2011 |
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Written by Geoff Ho
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Tuesday, 30 November 2010 |
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Geoff Ho, CFA – Director – Canadian Equities, Portfolio Advisory Group
One of the most common and widely followed investment strategies at the end of each year pertains to “tax loss selling.” This involves selling a position to create a capital loss which can then be used to offset taxable gains in previous and future years. Effectively, “tax loss selling” allows investors to rebalance a portfolio in a tax-efficient manner. What does one do with the proceeds from such a sale? In certain cases, where the fundamental outlook for the company and its relative return potential have improved and/or remain attractive, investors always have the option to repurchase the security after a requisite 30-day restriction period. In other cases, depending on market conditions, investors can take this opportunity to rebalance by switching from one industry group to another or consider other asset classes.
For those looking to redeploy the proceeds into equities, one should note that the timing of this strategy corresponds well with another popular investment idea referred to as “Dogs of the Dow.” In a book written by Michael O’Higgins, “Beating the Dow”, the author/investor shares his approach to consistently outperforming the Dow Jones Industrial Average over a long-term horizon. Considered by some as a form of contrarian investing, “Dogs of the Dow” suggests buying the ten highest yielding stocks in the index on an equal dollar weighted basis at the beginning of each year and then rebalancing annually. Notionally, the strategy asserts that blue chips with higher yields: a) have share prices that are trading near the trough of their respective business cycle and, b) suggests that management’s decision to maintain the relatively higher dividend indicates their confidence in the company’s long term prospects.
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