Heard of 'dog stocks'? Here's why you should invest in them when the markets are down

If you want to make money when the markets are down, invest in 'dog stocks' or high dividend-yielding stocks. Also known as underperforming stocks, investors can be the most profitable if the company turns around and increases its market share or growth rate. 

When management consultancy firm Boston Consultancy Group (BCG) wanted to evaluate a business in the 1960s, they created a growth-share matrix in the 1970s. The growth-share matrix used two factors: market growth and capacity to generate cash to identify a business's potential. The growth-share matrix involves classifying businesses into four categories: a star, a cash cow, a question mark, and a dog.  

• Companies in the question mark category have a low market share but are in a fast-growing market. These companies consume lots of cash and they may or may not be generating enough cash.
• A business that has a large market share, has high growth prospects, and generates increasing cash over time is called a star.  
• A cash cow category business has an established market share but low growth prospects. It also generates cash steadily and requires low investments.

So what is the dog category? Companies that fall in the dog category are companies that have low market share in a mature industry and have low market growth rates. These companies generate a comparatively low amount of cash and do not need hefty investments. You can call these companies ''chronic underperforming companies''.  

Why are they called dog stocks? Dogs are a man's best friend and are better known as fair-weather friends. They are always there to support you in every situation but become even more valuable when your personal circumstances are volatile.

Similarly, dog stocks consistently offer good dividend yields, more so, over the bank interest rates. 

Therefore, US stock brokers derived a strategy from this term and called it ''dogs of the Dow'', meaning the dog stocks of the US stock market. They invested their money in the top 10 highest dividend-paying companies out of the 30 companies that were listed on the Dow Jones index. This strategy was created so that investors could receive more returns from these 10 stocks as compared to investing in all 30 companies that form a part of the Dow Jones index. 

Why? The premise was that if the management of these high dividend-paying companies could find a way to make higher profits over the next few years, the investors would be the most profitable money makers. Any positive efforts of the management could increase the company's growth rate or increase its market share and move the company from the 'dog category' to the 'cash cow' or 'star' category.

Also, dividend-yielding stocks perform better than other stocks and give better returns in the long term when the market witnesses a bear market run. 

Companies in the Indian stock market that give the highest dividend yield: You can visit Screener.com and filter out companies based on the highest dividend yields. Our search found companies like:

1. Vedanta (19.41%)
2. National Mineral Development Corporation (Navratna company) (12.80%)
3. Standard Industries Ltd (11.5%)
4. REC Ltd (10.91%)
5. Power Finance Corporation (10.31%)

When stocks like these give almost double returns on your money, why would someone invest their money in a bank FD where you only get 5-6% returns?