The 2014 Dogs of the Dow

The Dogs of the Dow is one of the simplest strategies to beat the market. In 2013, it beat the Dow Jones Industrial Average (DJINDICES: ^DJI  ) by 8.4% for a total return of 35%. Read on to find the names of 2014's Dogs of the Dow.

The strategy
Dogs of the Dow is an investing strategy that buys and holds equal dollar amounts of the 10 highest-yielding dividend stocks of the Dow Jones Industrial Average. The strategy banks on the idea that blue-chip stocks with high yields are near the bottom of their business cycles and should do much better going forward. Investors in the strategy would then get not only 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. Many people fear that increasing dividend yields mean lower portfolio returns. Others think dividend payments mean management believes the business is done growing.

Evidence compiled by Tweedy, Browne refutes these beliefs. Research shows that portfolios of high-yield dividend stocks outperform lower-yielding portfolios and the market in general. In fact, a study by Wharton 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 a final balance of $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 by 0.2% in 2012 but came roaring back with 8.37% outperformance in 2013. The Dogs of the Dow's 34.87% return even bested the S&P 500's (SNPINDEX: ^GSPC  ) 30% return.

Check out the Dogs of the Dow performance in 2013:

Company

Initial Yield

Initial Price

2013 Performance

AT&T

5.34%

$33.71

9.74%

Verizon Communications

4.76%

$43.27

18.61%

Intel

4.36%

$20.62

30.86%

Merck

4.2%

$40.94

26.84%

Pfizer

3.83%

$25.08

26.21%

DuPont

3.82%

$44.98

49.15%

Hewlett-Packard

3.72%

$14.25

101.15%

General Electric

3.62%

$20.99

37.88%

McDonald's

3.49%

$88.21

13.59%

Johnson & Johnson

3.48%

$70.10

34.63%

Dow Jones Industrial Average

 

13,104

26.5%

Dogs of the Dow

   

34.87%

Dogs Return vs. Dow (percentage points)

   

+8.37%

 Source: S&P Capital IQ as of Jan 1, 2014.

So who are the 2014 Dogs of the Dow?

Company

Initial Yield

Initial Price

AT&T (NYSE: T  )

 5.23%

$35.16

Verizon Communications (NYSE: VZ  )

 4.31%

$49.14

Merck (NYSE: MRK  )

 3.52%

$50.05

Intel (NASDAQ: INTC  )

 3.47%

$25.96

Pfizer (NYSE: PFE  )

 3.4%

$30.63

McDonald's (NYSE: MCD  )

 3.34%

$97.03

Chevron (NYSE: CVX  )

 3.2%

$124.91

General Electric (NYSE: GE  )

 3.14%

$28.03

Cisco Systems (NASDAQ: CSCO  )

 3.03%

$22.43

Microsoft (NASDAQ: MSFT  )

 2.99%

$37.41

Dow Jones Industrial Average

 

16,576

Source: S&P Capital IQ as of Jan 1, 2014.

We'll have to wait and see whether the Dogs of the Dow will outperform in 2014.

Get Rich the Boring Way
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Read/Post Comments (4) | Recommend This Article (9)

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 January 10, 2014, at 12:16 PM, tobejs wrote:

    Dan--

    S&P Capital IQ (your data source) makes a flawed comparison: Dow-Dogs, equal-weighted with dividends, to DJIA, price-weighted without dividends. Put those two on the same footing and the entire return difference disappears.

    Here is my Forbes.com article with the calculations along with the reasons why we shouldn't expect the Dogs to outperform: http://www.forbes.com/sites/johntobey/2014/01/08/ditch-dogs-...

    John Tobey

  • Report this Comment On January 29, 2014, at 1:46 AM, TRogers91 wrote:

    I've been a fan of The Motley Fool since the dot.com days, and the counsel of this website helped me avoid that disaster. Back in those days, the Fools recommended the Foolish Four as a stock selection method. Some years later, The Motley Fool decided that they could no longer endorse that stock selection method. I have since shifted to the Dogs of the Dow, and have enjoyed success with it (despite the concerns Mr. Tobey discussed in the Forbes article cited above). How do the Foolish Four and the Dogs of the Dow methods differ (aside from the spelling)? They seem very similar in their methods.

  • Report this Comment On March 31, 2014, at 9:36 PM, TRogers91 wrote:

    To add further "nothing succeeds like success" evidence to my argument above, I anticipate a ROI of over 15% when I rebalance my Dogs of the Dow portfolio in the near future. The will be the third year consecutive year that I've enjoyed returns greater than 15%. If it's such a bad method, why has it done so well, and what does Mr. Tobey recommend as an alternative for the investor that wants a successful stock picking method that doesn't want to spend hours in research...which is often contradictory?

  • Report this Comment On March 31, 2014, at 10:07 PM, AgeOfRobots wrote:

    I just read your Forbes article Mr. Tobey, thank you for revealing the flaws in the Dow Dogs strategy.

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