Every year, on December 31, one of my favorite long-term trading strategies is revealed.
It’s called the “Dogs of the Dow,” and over the past 20 years, it has averaged 10% returns – that’s over the course of the dot-com bust, the 2008 financial crisis, and, yes, the 2020 global pandemic.
On the last trading day of the year, we find the 10 stocks with the highest dividend yields – and typical “Dogs of the Dow” traders will add these stocks to their portfolio, taking the dividend payments all year long.
That’s a good strategy, sure. But I play the Dogs of the Dow a little bit differently – and with my way, you’re making more than 10% per year.
See, with this unique strategy, you can spend 2021 collecting cash every single month.
This year, “add historical gains to my portfolio” should be at the top of your resolutions list – and we can cross that off all by trading the Dogs of the Dow like this…
Use the Flying Five to Unlock Profits Over the Next 12 Months
Over the past 20 years, the “Dogs of the Dow” strategy has outperformed the Dow, the S&P 500, and provided almost double the return on the average mutual fund performance.
And the way to trade these stocks is simple.
The basic idea is to buy Dow stocks that are paying the biggest dividend yields and hold them for a year.
This makes sense when you consider that dividend yield is calculated by dividing the current dividend amount by the stock price.
For example, a stock trading at $100 with a $2 annual dividend would have a dividend yield of 2% ($2 / $100). If the stock tanked to $50, the new dividend yield would rise to 4%.
It follows that the stocks that drop the most will have the highest yields.
Given that institutions favor stocks in the major markets including the Dow, it is likely that the top 10 depressed stocks will be bought up at discounted prices. This “bargain hunting” has the effect of driving these stocks back up in price over the following year.
Now, we can take this even further.
The five cheapest Dogs are what we like to call the “Flying Five,” which historically outperform the group.
Here are the details of the “Flying Five” system:
- On December 31, find the top 10 highest dividend yield stocks (Dogs of the Dow).
- On December 31, buy the cheapest five Dogs – or what we refer to as the “Flying Five”
- Hold them for one year and collect your quarterly dividend checks.
- Buy more stock with your dividend checks to harness compounding.
See? Easy as pie.
As of December 29, 2020, here are the projected Dogs of the Dow for 2021.
The Flying Five are highlighted in yellow. The Dividend Yield Forward (%) column shows the expected annual dividend yield for 2020. You can also see the current dividend amount in the Latest Dividend Amount ($) column.
One way to dramatically increase performance is to sell monthly call options on your Flying Five stocks. Selling calls on stocks (covered calls) are a great way to collect monthly premium in the neighborhood of 3% per month.
Here’s what you do:
Each month, sell one 30-day At-The-Money (ATM) or slightly Out-Of-The-Money (OTM) call option for each 100 shares of stock.
For these trades, be sure to not over sell. For example, if you have 110 shares of stock, sell one call option. If you have 200 shares of stock, sell two call options. You must have at least 100 shares of stock to use this strategy.
Let’s look at an example:
For example, 30-day ATM calls on Visa (NYSE: V) are bringing in $6.50 per share. With Visa currently trading at $215, that’s a 3% monthly return on the covered calls alone.
Multiply $6.50 x 12 months and you’ve reduced your cost basis by $78 for the year.
If history repeats, by the end of 2021, you’ll have a portfolio of five stocks that have all gone up, returned nice dividends, and monthly covered call premium.
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