The Dogs of the Dow Are Outperforming Their Index

The "Dogs of the Dow" dividend strategy is one of the simplest for beating the market. Over the coming year, I'll track the Dogs' performance and keep you abreast of news affecting these companies.

The strategy
The Dogs is an investing strategy that buys and holds equal dollar amounts of the 10 best-yielding dividend stocks of the Dow Jones Industrial Average (DJINDICES: ^DJI  ) . The strategy banks on the idea that blue-chip stocks with high yields are near the bottom of their business cycle and should do much better going forward. Investors in the strategy then would not only get large dividends but also gains in the stocks underlying those dividends.

High-yield dividends
High-yield portfolios are often dismissed as inferior to their growth counterparts for various reasons:

  • Many people fear that increasing dividend yields mean lower portfolio returns.
  • Others believe that dividend payments mean that management believes the business is done growing.

Evidence compiled by Tweedy Browne refutes these falsehoods. Research shows that portfolios of high-yield dividend stocks outperform lower-yielding portfolios and the market in general. In fact, a study by noted finance professor Jeremy Siegel found that over 45 years, the highest-yielding 20% of S&P 500 stocks outperformed the S&P 500 by three times! The highest-yielding stocks turned a $1,000 investment in 1957 into $462,750 by 2002, compared with $130,768 if the same money was invested in the index.

Performance
After beating the Dow by 6.8% in 2011, the Dogs of the Dow underperformed the Dow by 0.2% in 2012.

Check out the Dogs' performance in 2013 so far:

Company

Initial Yield

Initial Price

YTD Performance

AT&T  (NYSE: T  )

5.34%

$33.71

10.25%

Verizon  (NYSE: VZ  )

4.76%

$43.27

14.92%

Intel (NASDAQ: INTC  )

4.36%

$20.62

7.06%

Merck  (NYSE: MRK  )

4.20%

$40.94

9.00%

Pfizer  (NYSE: PFE  )

3.83%

$25.08

16.09%

DuPont  (NYSE: DD  )

3.82%

$44.98

10.27%

Hewlett-Packard (NYSE: HPQ  )

3.72%

$14.25

68.36%

General Electric (NYSE: GE  )

3.62%

$20.99

11.05%

McDonald's (NYSE: MCD  )

3.49%

$88.21

13.93%

Johnson & Johnson  (NYSE: JNJ  )

3.48%

$70.10

17.24%

Dow Jones Industrial Average

 

13,104

11.25%

Dogs of the Dow

   

17.82%

Dogs Return vs. Dow (Percentage Points)

   

+6.57%

Source: S&P Capital IQ as of March 30.

This week, the Dow Jones Industrial Average was up 0.40%. The Dogs rose more than the Dow, moving up 2.12%. That brings the Dogs' outperformance up to 6.57 percentage points better than the Dow itself!

Movers and shakers
The biggest mover this past week among the Dogs of the Dow was again Hewlett-Packard, which rose 3.47%. The second biggest mover was Intel, up 2.39%. On Tuesday, the government reported that PC sales rose 2.5% in February. Investors' concerns over declining sales have weighed on PC manufacturers, so the report was welcome news.

Upcoming
This week, ADP and the government release their reports on job growth. ADP is expected to report private-sector payrolls growth of 210,000, an increase from last month's 198,000. The government is expected to report nonfarm payrolls growth of 193,000, down from last month's 236,000 as the sequester kicks in and slows jobs growth.

More dividends
If you're looking for some long-term investing ideas, you're invited to check out The Motley Fool's brand-new special report, "The 3 Dow Stocks Dividend Investors Need." It's absolutely free, so simply click here now and get your copy today.


Read/Post Comments (2) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 31, 2013, at 8:51 AM, TheRacket wrote:

    While the numbers are valid, the conclusion is faulty because the difference is almost entirely due to one stock, HPQ. For example, one can say the same thing about many other groups as long as it includes HPQ.

  • Report this Comment On August 27, 2013, at 2:06 PM, Markt2405 wrote:

    About 10 or so years ago I thought MF was advocating a modified Dogs of the Dow strategy that recommended something like passing on the worst performing/highest yielding dog but doubling down on the next worst/highest yielding dog. Is that strategy no longer recommended? Also didn't that approach suggest the best time to use the strategy was around the beginning of the calendar year?

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