Dogs of the Dow Stocks

The Dogs of the Dow is an investment strategy developed by Michael O'Higgins in 1991 which suggests that each year investors should buy the ten Dow Jones Industrial Average (DJIA) stocks whose dividend is the highest percentage of their share price. Using other stock analysis methods, these stocks would be considered to be undesirable, or "dogs," but the Dogs of the Dow strategy proposes that these stocks have the same stocks have the potential for substantial increases in stock price plus relatively high dividend payouts. Learn More.

How the Dogs of the Dow Strategy Works

When it comes to an investing strategy, most investors will agree that simple is better. This is the appeal of blue-chip stocks which are known to have a slow, steady growth. One way for any investor to invest in blue-chip stocks is to invest in stocks that are listed on the Dow Jones Industrial Average (DJIA).

However, another advantage of investing in Dow stocks is that every one of the 30 Dow components pays a dividend. This allows investors to execute a simple strategy of selecting the top 10 dividend-paying stocks and putting an equal amount of money into each one. This strategy is known as the Dogs of the Dow. The Dogs of the Dow has been around for decades but gained renewed interest among investors in 1991 when author Michael B. O’Higgins wrote Beating the Dow. This book explained how if an investor chose the Dow’s 10 highest-yielding stocks they would have outperformed the broader Dow index for the majority of years leading up to the publication of the book.

But for most investors, the question is what have you done for me lately? In eight of the last 10 years, investors who followed a Dogs of the Dow strategy would have seen returns that outpaced the Dow index.

Although it’s hard to say for sure why the Dogs of the Dow strategy works, a common thought is that the companies that make up the Dogs will not alter their dividend strategy based on their stock price. This means that even when these companies are going through difficulties, they will maintain – and in many cases – increase their dividend.

Introduction

Investing in dividend stocks is considered to be one of the most predictable, and safest, ways to build your portfolio. Dividend stocks give investors the two-pronged benefit of predictable income from their investments and the opportunity for modest capital appreciation. Many investors, however, are hesitant to choose their own stocks. The Dogs of the Dow strategy is an investing strategy that removes the guesswork from investing in dividend stocks by pointing investors to a list of 10 stocks that they invest an equal amount of money into. It’s that simple. However, the key question to ask of any investment strategy is does it work? While no strategy is 100% effective, the Dogs of the Dow strategy works better than many other investing strategies. In this article, we’ll break down the Dogs of the Dow strategy so that you can see if it should have a place in your investment plan.

What does the Dogs of the Dow mean?

The Dogs of the Dow is a dividend investing strategy that has a goal of beating the Dow Jones Industrial Average (DJIA) on an annual basis by tilting a portfolio to high-yield dividend stocks. It is similar to investing in an index fund, but much simpler since it is truly a "set it and forget it" strategy.

Why the Dow?

The Dow is one of the oldest stock exchanges and most closely followed indexes in the world. The Dow Jones Industrial Average (DJIA) is an index of 30 blue-chip stocks. The DJIA is intended to serve as a barometer for how the general economy is performing, and more specifically, how the stock market is performing.

The stocks selected for the DJIA are publicly traded stocks that are listed on either the New York Stock Exchange (NYSE) or the NASDAQ. The Dow stocks are chosen by the editors of the Wall Street Journal who use general guidelines. This means that the Dow components are generally large, respected companies that are responsible for significant economic activity in the global economy. The current Dow stocks include many names familiar to investors and non-investors alike such as Disney, Coca-Cola, McDonald's and Microsoft. 

Every Dow stock pays a dividend

Another reason why the DJIA is used for the Dogs of the Dow strategy is that every stock in the index pays a dividend. Many of the Dow components are considered dividend aristocrats. This exclusive club (as of August 2018, only 53 companies were dividend aristocrats) is composed of S&P 500 companies that have not only made a dividend payout a priority but have also increased their dividend yield for at least 25 consecutive years. By definition, dividend aristocrats are required to meet certain market cap and liquidity requirements. 

How the Dogs of the Dow strategy works

An investor who wants to practice the Dogs of the Dow strategy will find the 10 highest dividend-yielding stocks at the beginning of the calendar year. Many stock screening tools will provide investors with an updated list of the Dogs of the Dow.

Investors will then allocate an equal percentage of money to each of these stocks. After that, they simply hold those stocks for the entire year and repeat the process at the beginning of the following year.

Does the Dogs of the Dow strategy work?

No investing strategy is successful 100% of the time and the Dogs of the Dow strategy is no different. There have been years that the DJIA index has outperformed the Dogs, but in general, the Dogs of the Dow strategy has had an impressive track record. In the most recent year, the Dogs beat the broader market posting a loss of 1.5% as opposed to a 6% loss for the DJIA. This was also the eight-time in ten years that the Dogs beat the DJIA. To put that in monetary terms, an investor with $10,000 in the DJIA at the beginning of 2008 would have seen their account grow to $17,350 by the end of 2018. The same amount of money invested in the Dogs of the Dow would have grown to $21,420.

Why the Dogs of the Dow strategy works

Although it's hard to say exactly why any investing strategy works or does not work, the Dogs of the Dow strategy is based on the conventional wisdom that blue-chip companies, such as those in the Dow will maintain a consistent dividend strategy that is independent of trading conditions. This means that the dividend, as opposed to a company's current stock price, is the better measure of a company's average worth. Put another way, a company that has a high dividend relative to its stock price are considered to be at the bottom of its business cycle. This means that there is a higher likelihood that the stock price of these companies will rise faster than companies with low dividend yields. Therefore an investor who continually reinvests in high-dividend-yielding stocks should outperform the market on an annual basis.

Can fund investors take advantage of the Dogs of the Dow strategy?

There are a select group of mutual funds and exchange-traded funds (ETFs) that invest in the Dogs of the Dow components. The ELEMENTS Dogs of the Dow (DOD) ETF focuses on only the top paying dividend-paying stocks in the DJIA on an annual basis. The fund reconstitutes itself annually to ensure that it is including only the top dividend payers. 

However, most of these funds only hold a percentage of their assets in Dogs of the Dow components. Three options are listed below:

• The Hennessy Balanced Fund (HBFBX) puts 50% of assets in the Dogs of the Dow and 50% in bonds.
• The Hennessy Total Return (HDOGX) fund puts 75% of assets in the Dogs and 25% in bonds.
• The ALPS Sector Dividend Dogs ETF (SDOG) starts with S&P 500 stocks and invests in the top dividend-paying names.

Because dividend yields are higher than the interest rate paid out by most bond funds, investing in a Dogs of the Dow mutual fund or ETF can be a more profitable alternative to bond funds. The risk of these funds is that these funds lack the diversity of other funds.

The final word on the Dogs of the Dow strategy

The Dows of the Dog strategy is a simple way to invest in dividend stocks that have been proven to beat the Dow index the majority of the time. The Dow is perhaps the most well-respected index in the world. And, because each of the 30 Dow components pays a dividend, they are some of the most important companies both in the United States and in the global economy.

The Dogs of the Dow strategy is a buy-and-hold strategy that is appropriate for long-term investors who are looking to minimize their risk. Investors can execute a Dogs of the Dow strategy by rebalancing their portfolio on an annual basis. Or they can invest in a mutual fund or ETF that tracks the Dogs of the Dow.