The Dogs of the Dow is an investment strategy with history. Michael B. O'Higgins suggested that one should purchase last year’s losers in the Dow Jones Industrial Average. The methodology is very simple:
Each year investors are to:
- Find the dividend yields of all Dow Jones Industrial stocks.
- Invest 10% of their capital in 10 of the highest-yielding companies.
- Liquidate and select new positions on January 1 of the following year, using the same methodology.
Sounds pretty simple, right? Well, let's break it down, see if the strategy is a winner, and what stocks make up the Dogs of the Dow.
Is it a Winning Strategy?
The Dogs of the Dow has a very simple goal: find stocks that are temporary losers. This is part of a bigger dividend growth investing strategy.
The emphasis on dividend yields is important as it:
- Finds yield – Go figure! Investors who purchase the highest-yielding Dow components obviously receive a very good yield for holding individual stocks. Had you purchased the Dogs of the Dow in 2012, you would receive an average dividend yield of 3.95% on your investment capital, more than two times the 10-year US Treasury rate. If all Dow components were to rise in value by the same amount from year to year, naturally it would be the highest-yielding stocks that provide the largest total return.
- Finds depressed stocks – Dividend yield is a function of price and dividends. Thus, if stock prices fall while dividends paid to investors remain stable, the yield rises and the security falls into the “Dogs” category. Ideally, the decline would be temporary, and the Dogs would rise to a higher value by the end of the year.
Dogs of the Dow Historical Performance
Going back 20 years, the Dogs of the Dow rewarded investors with a return of 10.8%. Interestingly, the total Dow Jones Industrial Average rewarded investors with exactly the same return – 10.8% for the last 20 years.
Only one Dogs of the Dow variant has proven to beat the performance of the DJIA – the so-called “small Dogs of the Dow” strategy. The Small Dogs of the Dow requires that investors further concentrate their positions by investing in only 5 of the highest-yielding Dow components with the lowest stock price. The ordinary Dogs of the Dow strategy tells investors to purchase the 10 highest-yielding stocks regardless of the stock price.
The Small Dogs of the Dow returned 12.6% to investors in the last 20 years.
For comparison, $1,000 invested in the S&P500 index would have grown to $6,254. The same investment in the Dogs of the Dow as well as the whole Dow Jones Industrial Average would have grown to $7,776. Finally, the Small Dogs of the Dow would have turned $1,000 into $10,734 in the same 20 year period.
2020 Dogs of the Dow
The Dogs of the Dow (DoD) returned 18.49% in 2019 according to Barrons. Their 2019 yield was 3.90%. Below is the 2020 DD line up. Included are the tickers and current dividend yield.
Company | Ticker | Yield |
|---|---|---|
Dow | DOW | 5.12% |
Exxon Mobile | XOM | 4.99% |
IBM | IBM | 4.83% |
Verizon | VZ | 4.01% |
Chevron | CVX | 3.95% |
Pfizer | PFE | 3.88% |
3M | MMM | 3.26% |
Walgreens | WBA | 3.10% |
Cisco | CSCO | 2.94% |
Coca-Cola | KO | 2.89% |
Year-to-date (YTD) yield is 4.79%. As you’d probably guess, the Dogs are down YTD, like most everything else. Their current percentage change is 16.2%. By contrast, the DOW is down 9.2% YTD.
Some Strategies Are Too Simple
The truth is that some strategies are simply too simple. While one could make the case that the Small Dows of the Dow strategy is a winner going forward (just look at past performance!) it ignores plenty of other data and influencer’s of a stock’s price.
All of the Dogs of the Dow are very large multi-nationals. These certainly are not companies that will grow tremendously going forward, which somewhat explains their high yields.
Additionally, these some names will likely to be on the Dogs of the Dow list for some time to come. Their low stock price relative to dividends may be justified – patent expirations significantly affect pharmaceutical profits, and the explosion of WiFi networks limits future data revenues for the telecommunication networks dependent on cell phone revenues.
Finally, the historical performance of the Dogs of the Dow is in some way influenced by perpetually falling interest rates during the 20 year period. Investors bid down yields as interest rates fall, which boosts stock prices. How much further can interest rates fall going forward as rates are already resting at historic lows?
How To Invest In Dogs Of The Dow?
Keep in mind that DoD is an income strategy (dividend paying) rather than growth strategy. Be sure that your investment objectives align before investing in DoD.
Since every DoD is a stock, you can begin investing in them by purchasing shares through any brokerage. DD is meant to be a buy and hold strategy. In other words, if any of your DD holdings begin going down, you would not sell them.
You can decide if you want your 10 DD to be equal by dollar weight. Dollar weighting means that you own the same dollar amount in each DD stock. For example, you allocate $10,000 to each DD, resulting in a $100,000 DD portfolio. As DD stocks move up and down, you can reallocate to bring things back into alignment. XOM might at some point be worth $15,000 while Pfizer is worth $5,000. To reallocate, sell $5,000 of XOM and buy $5,000 of Pfizer. This might be done once each quarter, twice per year, or just once per year.
Check out our list of the best brokers to find a commission-free brokerage to invest at.
Dogs Of The Dow ETFs
Unfortunately, there aren’t any ETFs that are 100% exposed to the Dogs of the Dow. Most have an equity/bond mix exposure. This mixture likely exists to offset market declines. Here are three funds that offer Dogs of the Dow exposure.
- Hennessy Balanced Fund (HBFBX): Large cap value fund. 50% of assets in the Dogs of the Dow and U.S. Treasury securities with a maturity of less than one year. The expense ratio is 1.89%.
- Hennessy Total Return (HDOGX): 75% in the Dogs and 25% in U.S. Treasury securities with a maturity of less than one year. The expense ratio is 2.32%.
- ALPS Sector Dividend Dogs ETF (SDOG): Seeks to replicate the the S-Network Sector Dividend Dogs Index. The expense ratio is 0.40%.
A More Logical Strategy
All in all, dividends do tend to boost shareholder returns. As cash returned to shareholders can be reinvested in the common stock of a particular company, investors benefit from high-yield companies as a group. Naturally, shareholders would prefer to reinvest a business’s earnings into more ownership of a business rather than see the cash sit in the company’s bank accounts for a paltry .5% annual return.
If dividends strike your fancy, an index like the SPDR S&P Dividend ETF (SDY) might be a better choice. The fund offers investors a spectacular dividend yield of 3.26% and better diversification among the 60 stocks in the S&P High Yield Dividend Aristocrats Index.
That fund has, for the last five years, generated annual returns 0.34% greater than S&P500 index funds, due mostly to the higher yield.
Readers, what do you think of the Dogs of the Dow investing strategy? Any strategies you recommend?
Robert Farrington is America’s Millennial Money Expert® and America’s Student Loan Debt Expert™, and the founder of The College Investor, a personal finance site dedicated to helping millennials escape student loan debt to start investing and building wealth for the future. You can learn more about him on the About Page, or on his personal site RobertFarrington.com.
He regularly writes about investing, student loan debt, and general personal finance topics geared towards anyone wanting to earn more, get out of debt, and start building wealth for the future.
He has been quoted in major publications including the New York Times, Washington Post, Fox, ABC, NBC, and more. He is also a regular contributor to Forbes.