The “Dogs of the Dow” strategy was popularized by Michael O’Higgins in his 1991 book “Beating the Dow.” The Dogs of the Dow are the 10 of the 30 companies in the Dow Jones Industrial Average with the highest dividend yield. The investor would allocate an equal amount into each of these 10 stocks and hold them for the entire year. They are called investment “Dogs” because rising dividend yields tend to be a function of falling prices.
Typically, an investor would need to only rid about two to three stocks every year and replace them with different ones. The stocks are typically replaced because their dividend yields have fallen out of the top 10, or occasionally, because they have been removed from the DJIA altogether. The strategy’s simplicity is one of its most attractive attributes.
The premise of this investment style is that the Dow laggards, which are temporarily out-of-favor stocks, are still good companies because they are still included in the DJIA. Therefore, holding on to them is a smart idea, in theory. Once these companies rebound and the market has revalued them properly, you can sell them and replenish your portfolio with other good companies that are temporarily out of favor.
Companies in the Dow have historically been very stable companies that can weather any market decline with their solid balance sheets and strong fundamentals. Furthermore, because there is a committee perpetually tinkering with the DJIA’s components, you can rest assured that the DJIA is made up of good, solid companies.
The 2016 returns:
Dogs of the Dow = 16.1%
Dow Jones Industrials = 13.4%
S&P 500 = 9.5%
Here are some historical returns:
|Investment||Symbol||2011||2012||2013||2014||2015||1 Year||3 Year||5 Year||10 Year||Since 2000|
|Dogs of the Dow||–||16.3%||9.9%||34.9%||10.8%||2.6%||2.6%||16.1%||14.9%||10.6%||7.9%|
|Dow Jones Industrials||–||8.4%||10.2%||29.7%||10.0%||0.2%||0.2%||13.3%||11.7%||9.1%||6.3%|
Variations of the Dogs
Because of this strategy’s simplicity and its returns, many have tried to alter it in an attempt to refine it, making it both simpler and higher yielding. There is the Dow 5, which includes the five Dogs of the Dow that have the lowest per share price. Then there is the Dow 4, which includes the 4 highest priced stocks of the Dow 5.
A contrarian strategy of favoring the worst over the best doesn’t always work out, but it often does. Consider the worst-performing stock in the 30-member Dow Jones Industrial Average in 2015 was Wal-Mart. The retailer’s shares produced a dividend-adjusted loss of 26.6% in 2015 but was up 14.3% in 2016 including dividend. In contrast with Nike which had a big gain of 31.4% in 2015 but had loss of 17.4% in 2016!
The Dogs of the Dow for 2017
|The Dow stocks ranked by yield||12/31/16||12/31/16|
|IBM||International Business Machines||165.99||3.37%|
Dogs of the Dow strategy is not fool-proof
Dow Industrial Average is price-weighted but the Dogs of the Dow assumes equal weighting which can explain some performance differences over the long-term. Part of the outperformance can also be attributed to differences in overall dividend yields.
The Dogs of the Dow is a simple stock picking strategy and can be very effective over the long-term. Owning 10 of highest yielding stocks of the 30 Dow stocks which are out of favor with Wall Street gives the investor some downward protection and some extra income.
What do you think about “Dogs of the Dow?”
Disclaimer: This post is for discussion purposes only!