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Mean reversion theory is an essential concept in understanding the valuation and long-term trajectory of stock prices. It is predicated on the premise that asset prices and historical returns eventually revert back to their long-term mean or average. This implies that stocks that have underperformed the market over a certain period have a tendency to increase in value and converge back to their mean performance.

In the context of the 'Dogs of the Dow' strategy, investors rely on this theory, asserting that the selected companies with poor recent performance are likely to see a reversal towards their historic norms. Despite the short-term downturns, these companies are anticipated to be fundamentally strong with potential for recovery. This belief in mean reversion supports the rationale that current 'Dogs' could be undervalued, presenting a prime opportunity for appreciation.

A high dividend yield often signals that a stock is undervalued. It is calculated by dividing the annual dividends per share by the stock's price per share. When yields are high, it means investors are getting a significant return on their investment through dividends, relative to the stock's price.

Investors favor high-yielding stocks for the Dogs of the Dow strategy because they not only provide a steady income stream through dividends but may also depict potential for capital appreciation. It's important to mention, however, that while a high dividend yield can be attractive, it shouldn't be the sole factor in investment decisions. Other metrics and company fundamentals should also be reviewed to avoid chasing yields in companies with unsustainable dividends or deteriorating business models.

Portfolio rebalancing is a significant part of investment management, ensuring that an investor's holdings align with their risk tolerance and investment goals. This involves periodically buying or selling assets in a portfolio to maintain a desired level of asset allocation or exposure.

With the Dogs of the Dow strategy, rebalancing happens annually. Investors sell stocks that are no longer part of the highest dividend yielders and purchase new ones that have entered the category. This methodical portfolio rebalancing aids in maintaining a disciplined approach, encourages the practice of buying low and selling high, and minimizes the risks associated with holding onto stocks that no longer fit the initial investment criteria.

The Dow Jones Industrial Average (DJIA) is one of the oldest and most widely followed stock market indices in the world. It consists of 30 prominent companies from the United States, representing various sectors of the economy except for transportation and utilities.

The stocks within the DJIA are typically seen as industry leaders and are influential in their respective sectors. Because of the Dow's long-standing reputation and its composition of established, reliable companies, the index is often used as a barometer for the overall health of the U.S. stock market and economy. The Dogs of the Dow strategy specifically utilizes the DJIA because of the index's proven blue-chip stocks that have an extensive track record of performance and paying dividends.