Last year, the Dogs of the Dow (DOD) performed like dogs, declining over 6%, even with dividends included. The high-dividend investment strategy also underperformed the over 9% total return of the Dow Jones Industrial Average. However, the Dogs of the Dow is a conservative dividend investing strategy that has worked well over the years. The simple investment strategy involves buying the ten highest-yielding stocks among the thirty components of the Dow Jones Industrial Average. It may seem simple, but the Dogs of the Dow have averaged a 9.5% annual return since 2000, outshining the 7.5% average return from the S&P 500 Index. On a longer-term basis, since the turn of the century, Dogs of the Dow strategy has an average annual total return of 10.8%, beating the Dow Jones Industrial Average at 8.4% and the S&P 500 at 7.7%.
What are the Dogs of the Dow?
Dogs of the Dow gain popularity after Michael O'Higgins introduced this investment strategy in 1991 on the dogsofthedow.com website. The strategy involves selecting the ten highest dividend-yielding stocks of the past year from the 30 stocks of the Dow Jones Industrial Average (INDU). The strategy then recommends investing the ten INDU stocks in a basket in equal amounts. The long-term dividend investment strategy intends to outperform INDU by focusing on the ten highest dividend-yielding blue-chip stocks of the INDU. It is quite simple to implement. After the stock market closes on the last day of the year, select only the ten highest dividend-yielding stocks in the INDU. On the first trading day of the New Year, invest an equal dollar amount in each of them. Hold the portfolio for a year, and then repeat the investment process.
Dogs of the Dow Concept
The Dogs of the Dow rests on the belief most blue-chip companies do not change their dividend frequently. These companies tend to focus on long-term profits and returns to shareholders as compared to short-term trading conditions. Therefore, the company's dividend yield reflects the longer-term prospects of the company. A company that can consistently raise its dividends year over year will produce superior growth, longer-term.
Companies with a high dividend relative to their stock price also imply the company may be trading near the bottom of their business cycle. It would indicate that their stock price can increase faster than companies with lower dividend yield relative to their stock price. Under this scenario, an investor following the Dogs of the Dow strategy of reinvesting in high-dividend-yielding companies yearly can outperform their peers and the market over time.
Remember, high dividend-yielding stocks offer both current income (dividend yield) and growth potential (capital gain). During periods of market uncertainties, it would not surprise us why so many investors are comfortable with this strategy. After all, the thirty INDU stocks are the largest, most reputable, influential, and the highest-paying dividend-yielding names.
How to Implement the Dogs of the Dow Strategy?
The investment strategy is simple to implement. You can directly select the ten highest-yielding INDU stocks and build your Dogs of the Dow portfolio each year. The ten Dogs of the DOW for 2021 are CVX (5.53% yield), IBM (5.04%), DOW (4.59%), VZ (4.32%), WBA (3.86%), MMM (3.53%), KO (3.27%), CSCO (3.14%), MRK (2.98%), and AMGN (2.71%). The collective average annual for DOD is an impressive 3.90%, exceeding many fixed income securities.
You can also purchase the DOD through exchange-traded funds (DODXF and SDOG) and mutual funds (HBFBX and HDOGX). Note the Small Dogs of the Dow strategy of investing in the five of the DOD with the lowest prices at the end of the previous year show an even better performance with an average annual total return of 12.5%, longer-term.
Investing in Dogs of the Dow can be another way for investors to invest in value stocks. If market experts are correct about an investment shift to value stocks, then the Dogs of the Dow strategy can be an alternative way to play the value call.
Investing is complicated. Even implementing a simple, low-maintenance, and long-term high yielding investment strategy such as Dogs of the Dow strategy has risks. Although DOD performance has been impressive longer-term, there have been years when the INDU has outperformed the DOD. One final note of caution, investing strategies comes in all shapes, size, and favors. Just like food diets, there is no best or ideal. The best investment strategy is the one that works best for you and your clients.
Enclosed are the charts of the ten Dogs of the Dow for 2021, DOD ETFs, and mutual funds.