Imagine a stock investment strategy that doesn?t require you to scan company balancesheets, track daily price tickers and yet yields a return that more often than not outperforms even the best of the stock indices.

Goofy it may sound, but there is a simple mechanical way of creating a small portfolio of stocks that, studies have shown, can beat the market over a long period of time.

Called the Dogs of the Dow, the strategy was first popularised by Michael O? Higgins in 1991 in the US.

Like our own BSE sensex, the Dow Jones Industrial Average represents an elite group of 30 well-known and mature companies which have strong balancesheets with sufficient financial strength to ride out rough times. From time to time, some are dropped from the list and new leaders are included.

However, there are always some laggards that are temporarily out of favour and selling at a low price. Higgins called them Dogs of the Dow.

The basic theory is to spot the top 10 Dogs, invest an equal sum of money in each stock and hold on to them for one year. After a year, sell the stocks which are no longer on the current top 10 Dogs list and rebalance your portfolio with the new Dogs.

Higgins showed that the Dogs portfolio averaged a return of 17.9 per cent compared with 11.1 per cent of the Dow Jones between 1973 and 1989. A study by the Barron?s magazine in 1993 claimed that the Dogs strategy gave an investment return which was more than twice the overall Dow Jones Industrial Average and two times the Nasdaq return in that year. However, the Dogs strategy under-performed only thrice in the last 30 years ? in 1997, 1998 and 2004.

Do the Dogs wag their tails in India, too? A 2003 study by a research scholar at IIM Ahmedabad to see whether the so-called Dogs of the Dow theory has any significance in the Indian context finds that the Dogs of the BSE sensex outperformed the index itself between 1996 and 2001 by hefty margins. Unfortunately, the full report is not in the public domain.

A similar study by investment analysts in a reputed brokerage firm based in Mumbai also revealed the same results, except in 2003 when the BSE index overwhelmed the Dogs.

A quick pick of the Dogs in 2005 reveals they averaged a return of 53.2 per cent (including the benefits of dividend payment, stock splits, rights and bonus shares) against a 40.98 per cent by the sensex.

An interesting aspect of the studies with the Dogs strategy was that it gave a positive return when the stock markets went into a slumber.

Holding a particular Dogs portfolio for a year also saves the investor from paying the capital gains tax.

How to select a Dog

It?s simple. Companies with higher dividend yields than their peers are called the Dogs. Dividend yield is calculated by dividing the last dividend paid (per share) by the company with its current share price. A higher dividend yield stock indicates it?s low priced at the moment and can be a value investment. The 10 highest dividend yield stocks in the 30-share index are the ?Dogs of the BSE? in a given year.

Picking the portfolio

The original rule says there should be 10 Dogs in the portfolio and an equal sum should be invested in each of them. This means that one should invest one-tenth of his investible fund in each of these stocks.

Higgins suggested the portfolio rebalance should be done at the first day of the following year. However, there is no reason why one should wait for the new year. The basic idea of stock investing is to buy at a lower price and sell at a higher price. So, one can start at any time of the year when the market is depressed and rebalance the portfolio when it is high. But this will have two pitfalls ? first, one has to keep an eye on the market movements regularly, and second, the capital gains tax benefit will not be there if sold within a year.

There are pups, too

If you have a small investment kitty, you may try with five Dogs. Those with the lowest share price are the Small Dogs or Puppies for you. The investment procedure, however, remains the same. But you now allocate a greater percentage (20 per cent) of your investible fund in each of them. In fact, Small Dogs have a greater potential to give a higher return, but this portfolio is risky, too.