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Dow Dividend Theory

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The Dow dividend theory is a popular but simple investing strategy. There are several variations of the Dow dividend theory, but put simply, you find the 10 stocks of the 30-stock Dow Jones Industrial Average with the highest yield (dividend / price) and invest equally in each. The Dow dividend theory also requires that you repeat this process once a year. The logic underlying the Dow dividend theory is that stocks with the highest yields have recently been the worst performers. (That's why the Dow dividend theory is also known as the Dogs of the Dow.) However, all the stocks in the Dow dividend theory universe are blue chips. In other words, a stock bought under the Dow dividend theory is high quality; the low stock price merely reflects that the stock (or its sector) is temporarily out of favor. But prices of even the blue chips of the Dow dividend theory can fluctuate substantially during the year. Thus the Dow dividend theory lets you continually rotate your portfolio so it has high-quality stocks with excellent potential for price appreciation.

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