“Dogs of the Dow” is an exhilarating investment strategy that endeavors to outperform the Dow Jones Industrial Average (DJIA) by allocating portfolios towards high-yield investments. The essence of this approach is to invest in the top 10 highest dividend-yielding, blue-chip stocks out of the 30 components in the DJIA. This strategy necessitates rebalancing at the start of every calendar year.
Key Benefits
- The Dogs of the Dow strategy gained prominence in 1991.
- It maximizes investment yield by buying the top 10 high-dividend stocks from the DJIA annually.
- Historically, the strategy’s returns closely follow the DJIA, though performance varies over time periods.
Understanding Dogs of the Dow
The Dow is a venerable and highly-followed index globally, often seen as a barometer of the broader market. The Dogs evolutionarily attract attention for their straightforward formula designed to perform on par with the Dow.
Though the idea isn’t revolutionary, it catapulted in popularity in 1991, thanks to Michael B. O’Higgins’ book, Beating the Dow. Here, O’Higgins also coined the moniker “Dogs of the Dow.”
Dogs of the Dow Methodology
This strategy hinges on the belief that blue-chip companies do not alter their dividends in the short term to reflect trading conditions; hence, the dividend becomes a yardstick of the average company’s worth. Conversely, the stock price fluctuates.
Companies with a high dividend relative to their stock price are presumably at the bottom of their cycle, positioning them for faster growth once reinvested in high-dividend-yielding firms. This could lead to outperforming the overall market.
Various avenues exist to purchase these securities—they can be handpicked, bought through exchange-traded funds (ETFs), or by following the Dogs of the Dow setup for better yields than the Dow itself. Surprisingly, the Dogs have often managed to outperform the Dow over a year.
2023 Dogs of the Dow
As of December 30, 2022, the selected Dogs of the Dow are:
| Ticker | Company | Dividend Yield | |
|---|---|---|---|
| 1 | VZ | Verizon | 6.62% |
| 2 | DOW | Dow | 5.56% |
| 3 | INTC | Intel | 5.52% |
| 4 | WBA | Walgreens | 5.14% |
| 5 | MMM | 3M | 4.97% |
| 6 | IBM | IBM | 4.68% |
| 7 | AMGN | Amgen | 3.24% |
| 8 | CSCO | Cisco | 3.19% |
| 9 | CVX | Chevron | 3.16% |
| 10 | JPM | JP Morgan Chase | 2.98% |
How the Dogs of the Dow Strategy Works
This strategy simplifies stock picking and adds a layer of security by focusing on blue-chip stocks. Here’s how:
On the last trading day of the year, identify the 10 highest dividend-yielding stocks in the DJIA. On the first trading day of the new year, equal amounts of money are invested in each. Hold the portfolio throughout the year and repeat annually.
With several resources available—from opinions and commentary to calculators and screeners—the strategy’s appeal lies in its low-maintenance, long-term mimicry of DJIA performance. Over time, its performance has been noteworthy, with years of both underperformance and impressive returns compared to the Dow.
Sample Performance Comparison
While the Dogs of the Dow experienced deeper losses during the 2008 financial crisis, it notably regained footing over the subsequent decade, keeping pace with the DJIA.
From 2013 to 2023, the Dogs delivered a trailing total return of 10.02% as compared to the DJIA’s 11.48%. In the last five years, 2018-2023, the Dogs had a trailing return of 5.29% versus the DJIA’s 8.39%.
Image by Sabrina Jiang © 2021
Is There an ETF That Tracks the Dogs of the Dow?
While no specific ETF mirrors the Dogs of the Dow strategy, similar ETFs with a dividend focus on the Dow like Invesco Dow Jones Industrial Average Dividend ETF (DJD) and ALPS International Sector Dividend Dogs ETF (IDOG) are viable alternatives.
What Companies Are in the Dogs of the Dow?
The current line-up for 2023 includes:
- Verizon
- Dow
- Intel
- Walgreens
- 3M
- IBM
- Amgen
- Cisco
- Chevron
- JP Morgan Chase
How Are the Dogs of the Dow Chosen?
Selection is straightforward: choose the 10 DJIA companies with the highest dividend yields on the last trading day of the year.
Final Reflections
Despite underperforming the DJIA slightly over the past decade, the Dogs of the Dow offer a robust dividend strategy for investors seeking fixed income. For pure returns, however, the DJIA or the S&P 500 might be superior long-term investments.
Related Terms: Dow Jones Industrial Average, Blue-Chip Stocks, Dividends, Investment Strategy.
References
- Mohamad Ghouse, Siti Hajar Nadrah and Ahmad, Noryati. “Conceptual Paper of the Trading Strategy: Dogs of the Dow Theory (DoD)”. June 4, 2014, pp. 6. Download PDF.
- Dogs of the Dow. “2023 Dogs of the Dow”.
- S&P Dow Jones Indices. “Dow Jones High Yield Select 10 Index”, Graph View: Total Return; Compare: Dow Jones Industrial Average, 10 Year.
- S&P Dow Jones Indices. “Dow Jones High Yield Select 10 Index”, Graph View: Total Return; Compare: Dow Jones Industrial Average, 5 Year.
