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Such a sad day. Grandma has passed away. But old people die. Not all of them, though, spend three decades squirreling away a chunk of Thursday’s meat money, the way dear old Granny did. She has willed you $12,000, and it’s yours now, minus the bite the IRS took out of it. So what should you do with this tidy windfall? A sensible inner voice advises investing in the stock market — but you haven’t had much experience and are leery of getting burned. Nonsense. With a little effort, you too can invest like a pro. A good place to start is by following the most basic of the so-called Dogs of the Dow strategies. Come again? Dogs? Dow?

Let’s start with some definitions. You’ve heard of the Dow Jones industrial average. The Dow, meant to reflect the condition of the overall stock market, is a compilation of the stock prices of 30 well-known American companies. It includes Philip Morris, General Motors, and DuPont. And these 30 companies pay dividends — a portion of the millions they earn — to their shareholders. Philip Morris, for example, pays $1.20 a share in dividends four times a year, for a total of $4.80 over the course of the year.

When you buy Philip Morris stock, that annual dividend is your “yield” on your investment. The yield is simply the cash dividend divided by the stock price. Pay $100 for a share of Philip Morris stock, and the company returns $4.80 to you; that’s a 4.8% yield. But here’s the key: If the stock price drops to, say, $90, you still get the $4.80, even though you put up less money. And the yield is now 5.3% ($4.80 divided by the new stock price, $90). A rising yield means either that the stock is going down or that the company has raised its dividend. Stocks that have high yields and whose market prices are not increasing are called “dogs” on Wall Street.

So what have stock market wizards — the ones who aren’t consumed with earning commissions — come up with? Buy the dogs, they say. In the case of the “Dow 10,” that’s the 10 highest yielders — the 10 biggest dogs, to be exact. Several forces make the Dow 10 strategy work: the chance that a stock will go up, the variety of stocks in the portfolio, and the dividends these Dow companies pay shareholders.

Again, Philip Morris, currently the highest yielder on the Dow, is a good example. Yes, the company makes a controversial product, which is why the stock tanked last summer after a jury in Jacksonville, Fla., awarded $750,000 to a two-pack-a-day smoker of Lucky Strikes who developed lung cancer. Philip Morris (not the manufacturer of Luckies) dropped $14 a share the day of the verdict, from more than $105 to just a little over $90. (So the yield went up, right?). But Wall Street, God bless it, overreacted. Philip Morris has crept back up to about $125 since the Jacksonville verdict, on the back of its still-profitable tobacco business and the potential of its Kraft and Miller brewing divisions.

Say that Philip Morris does eventually tumble — maybe future court settlements will be truly crippling (though it’s not the job of the Dow 10 investor to try to guess if this will happen). There are still nine other stocks in the Dow 10 that can pick up the slack. It only takes a couple of winners for the entire portfolio to shine.

The third reason the strategy works is the dividend. Many public companies offer no dividends at all. But invest $10,000 in Philip Morris shares, and at the end of the year you’ll have earned about $400. This money gets plowed back into your portfolio of 10 stocks and keeps growing.

When considering the Dow 10 strategy, remember three things. One is that it is mindless. It involves buying just 10 stocks, with no research required. And a number of institutions will set it up for you for a small fee, so participating only requires a phone call and the ability to write a check. What is more, the Dow 10 isn’t a terribly risky strategy, because it’s an investment in a diversified basket of established companies. You won’t be squandering Grandma’s legacy: In two decades, the Dow 10 has lost money only two years.

Last, and most important, the Dow 10 system may make you some real money. You can do at least as well as your annoying stockbroker friends from college. If you fancy yourself a sophisticated investor — and have been smirking at the simplicity of the Dow 10 strategy — chew on this: Investing strategies based on the Dogs of the Dow philosophy have beaten 90% of mutual-fund managers, regularly for more than 20 years.

Jim O’Shaughnessy, a money manager in Greenwich, Connecticut, has calculated that if your parents had started a $10,000 Dow 10 investment fund for you in 1975, and stuck to the strategy, it would now be worth more than $400,000. O.K., if your parents were that farsighted, you wouldn’t need investment advice from us. Still, just $5,000 invested in 1992 would be worth more than $10,000 today, enough of a gain for you to dip into your nest egg for a sharp Hugo Boss jacket and still keep saving for retirement.

Merrill Lynch, Smith Barney, Paine Webber, Prudential, and Dean Witter each have a trust called the Select 10 series. Make the initial call, to (800) 562-2926, and pick one of the above-named brokerage houses. In about five days you’ll get a brochure and a call from a broker from the firm of your choice. From that point on, it will be relatively easy to start playing the Dow 10. Expect to pay the broker around 2% of your total investment each year. On $10,000, that’s $200.

There are also many variations on the Dogs of the Dow strategy that shouldn’t be overlooked, though they are all based on the same basic premise: Invest in beaten-up, established stocks that also sport high dividend yields. O‘Shaughnessy, for example, favors a “Dogs of the Market” approach, adding 50 high-yielding stocks that also meet other fundamental restrictions. Prudential and Dean Witter will build you a Flying Five portfolio, which starts with that list of the 10 highest yielders and invests in only the five with the lowest stock prices.

If you have a brokerage account, or are willing to set one up, you can invest in the Dow 10 yourself. Be aware that even a so-called discount broker, such as Charles Schwab & Co., costs around $50 a trade. To buy 10 stocks will cost $500 in commissions, so the Dow 10 will have to do all the better just to cover these expenses. If you’re comfortable on the Internet, you can do Web-based trading for less than $15 a transaction. E-Trade and eBroker are fair options. But, mind you, there is no handholding here; you’re on your own.

Whatever method you choose, remember to buy equal dollar amounts of each of the 10 highest yielders (with $10,000, that means $1,000 worth of Philip Morris, $900 worth of Texaco, and so on). A year later, get the new list of the highest yielders. Some will undoubtedly be repeats — hold on to them. Sell the others, and use the money to purchase shares of the new dogs, spending an equal amount on each. Example: If six of last year’s dogs repeat, and you sell the other four for a total of $12,000, buy $3,000 each of the four new ones.

Whether you’ve been investing for years or have never even seen a copy of The Wall Street Journal, the Dogs of the Dow strategy is a solid investment — over time it’s likely to do better than most investment strategies. The key is to stay the course and ride out the tough patches. We don’t need to tell you that every dog has its day.

Alexander Haris is a senior editor for Individual Investor Magazine. Dogs of the Dow. . March 1997.

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