Here Are the 2019 Dogs of the Dow

For most investors, the simpler their investment strategy, the better. Even the most conservative investors can feel comfortable investing in the stocks included in the Dow Jones Industrial Average (^DJI -0.65%), so using this basket of 30 stocks to guide your investments is a no-brainer, even for beginners.

One popular strategy known for its simplicity is investing in the top dividend stocks included in the Dow index. Although all 30 Dow components pay at least some dividend, the amounts vary widely. By narrowing in on top payers, this simple strategy produces above-average dividend income and makes picks with a value focus -- two ingredients that have often led to solid returns. This strategy, which has come to be known colloquially as the Dogs of the Dow, has been quite successful lately. Below, we'll explain the Dogs of the Dow strategy, including the list of corresponding stocks for 2019, and help you decide whether the strategy is something to pursue for your own portfolio.

Image source: Getty Images.

What is the Dow?

To understand the Dogs of the Dow strategy, you first have to know what "the Dow" is. The Dow refers to the Dow Jones Industrial Average, one of the stock market benchmarks that Charles Dow created in the late 19th century. Most benchmarks, also known as indexes, are groups of securities that are chosen with the intent of representing a particular market, industry, or other subgroup of similar stocks. Although some other well-known indexes, such as the S&P 500's index of 500 large U.S. companies, came later, Dow's benchmark was noteworthy as being the first to become widely used. Although Dow also created indexes that included stocks from other sectors of the market, including the Dow Jones Transportation Average and the Dow Jones Utility Average, it was the benchmark that covered industrial stocks that became the most popular gauge of stock market performance.

Over time, the Dow grew in size, expanding from its original slate of 12 stocks to reach its current total of 30. The Dow has also seen its scope widen, so that you'll now find companies that most would consider to be in non-industrial sectors among its components, including financial, technology, consumer goods, healthcare, energy, and materials stocks. The 30 stocks that make up the Dow change from time to time as determined by a selection committee overseen by S&P Dow Jones Indices. However, the Dow is among the most stable market benchmarks, making relatively few changes over time and providing a snapshot of many of the most influential businesses in the world. It's from these 30 stocks that the Dogs of the Dow strategy draws its final selections.

What are the Dogs of the Dow, and how do you find them?

The Dogs of the Dow strategy picks 10 stocks from the Dow Jones Industrial Average at the beginning of each year. To determine which of the 30 Dow stocks will be the Dogs for the given year, you first have to take all of the stocks and determine their dividend yield -- the amount of money that the company pays in regular payments known as dividends each year, divided by the stock price. Then, put the stocks in order, with the highest dividend yields as of the last day of the previous year at the top of the list. The top 10 stocks qualify as that year's Dogs of the Dow. 

If that sounds simple, that's because it is. But the idea behind the Dogs of the Dow makes sense from a portfolio management standpoint. For investors who like to choose stocks that pay dividends, which are regular payments of income that many companies make, choosing the highest-yielding dividend-paying stocks from the Dow Jones Industrial Average ensures that the amount of income that the Dogs of the Dow generate will be greater on a percentage yield basis than the Dow overall. 

Meanwhile, because the stocks in the Dow are generally among the most successful businesses in the U.S. and don't tend to have huge financial hiccups very often, dividend payments typically stay stable or rise gradually over time. As a result, when a dividend yield rises, it's often because the stock price has seen a temporary slump that has pushed the yield above that of its counterparts in the Dow. That appeals to investors who like to buy stocks at bargain prices.

The origin of the strategy helps explain its name. In the early 1990s, author Michael B. O'Higgins explained in his book Beating the Dow that by choosing the Dow's 10 highest-yielding stocks, one would have outperformed the overall Dow's returns in the vast majority of past years. He referred to these stocks as "dog" stocks because the companies that the strategy picked were often experiencing temporary challenges to their businesses. 

To use the Dogs of the Dow, you take the amount of money you have to invest and then divide it into 10 equal parts. Using each part, buy shares of each of the 10 Dow stocks. Hold onto those stocks throughout the entire year. You don't need to continuously monitor dividend yields to determine whether an existing Dog stock has dropped out of the top 10 yielding stocks or whether a new stock has taken its place. In the unlikely event that a Dog is removed from the Dow -- something that happened during 2018 -- you still don't do anything: just leave the stock for the remainder of the year.

At the end of the year, you'll look at the 30 Dow stocks again and put them in order by dividend yield from highest to lowest as of that later date. Inevitably, at least some of the stocks move into or out of the top 10. If you decide to use the strategy for another year, you'll need to sell the exiting Dogs from the previous year and buy the new ones, being sure to rebalance your holdings so that you own equal amounts of each of the 10 Dogs as the beginning of the new year.

How have the Dogs of the Dow performed historically?

Historically, the Dogs of the Dow have produced mixed performance over time. Over the past decade, the Dogs of the Dow have seen an unusually positive period, beating the performance of the overall Dow Jones Industrial Average in eight of the past 10 years.

• In 2018, the Dogs weren't able to avoid losses entirely, but their 4% loss was less than the Dow's overall 6% decline.
• 2017 was a poor year for the Dogs, which underperformed the overall Dow 19% to 25%.
• In 2016, the Dogs posted a win, with price gains of 20% versus the Dow's 17%.
• 2015 was a modestly positive year for the Dogs, which saw a nearly 3% rise, compared with a breakeven result for the Dow.
• The Dogs eked out a win in 2014 by a single percentage point, 11% to 10% over the Dow.
• 2013 was a relatively huge winner for the Dogs. Their return of 35% topped the Dow's 30% jump.
• In 2012, the Dow Jones Industrials beat out the Dogs by just a fraction of a percentage point. Both strategies returned about 10%.
• 2011 was a huge year for the Dogs, which posted an 11 percentage point victory over the Dow.
• The Dogs also managed to beat the Dow in 2010, by a strong 16% to 9% margin.

However, when you look more broadly, the Dogs of the Dow haven't been nearly as successful as their recent run would suggest. The Dogs suffered defeat in three straight years from 2007 to 2009, and over the past quarter-century, there have been about the same number of years in which the Dogs beat the Dow as there were years in which the Dogs lost to the Dow.

Even so, the strategy retains a solid following, and it's easier to execute than buying all 30 stocks in the Dow Jones Industrial Average. So without further ado, here are the 2019 Dogs of the Dow stocks.

The 2019 Dogs of the Dow

Data source: Yahoo! Finance.

There wasn't much turnover in the Dogs for 2019 compared with the 2018 list, with novice JPMorgan Chase replacing General Electric this year. However, there were still some interesting moves up and down the list of 10, and while that's not important for determining which stocks are Dogs of the Dow, it's useful in evaluating their prospects for 2019. Let's look at each of the Dog stocks.

IBM

IBM has had a tough time lately, and the tech giant didn't escape its funk in 2018. The stock was the third worst performer in the Dow on a total return basis, and though the business saw some signs of life, it wasn't able to turn things around entirely. Its losses vaulted IBM to the top spot in terms of dividend yield.

To recover fully, IBM must rediscover its innovation. The company known as "Big Blue" managed to evolve beyond its concentration on hardware to avoid getting trapped by margin compression in that business, but the company has been slow this time around in identifying ways to stay maximally engaged in the highest-growth areas of technology. IBM is trying to address that by buying Raleigh-based software company Red Hat, and followers of the Dogs of the Dow have to hope that the move isn't simply one of desperation that's too late to make a real difference. At least shareholders will enjoy a high dividend yield as they look for IBM to avoid further share-price declines.

ExxonMobil

For ExxonMobil, 2018's wild swings in energy prices proved difficult for business. The plunge in crude oil during the last two months of the year caused all sorts of havoc, and even the integrated oil giants felt the pinch. It's been a long time since Exxon's dividend yield was higher than Verizon's, but the solid growth in Exxon's payout over time was enough to push the oil company up the list when combined with its double-digit share-price decline.

Few expect oil prices to remain this low for the long run, and the shakeout of weaker players in the energy space might well end up being favorable for ExxonMobil. In past cycles, recoveries in oil prices have lifted stocks across the sector. With ExxonMobil doing its best to make smart long-term strategic plays to keep production capacity up, investors are optimistic it will participate in any recovery for the industry.

Verizon

Verizon's been a perennial Dog of the Dow, and its yield keeps it at the top of the list. That makes 2019 a bit odd for the telecom giant, but Verizon's done well to survive a brutal price war in the wireless network space. Despite the fact that many of its competitors have resorted to offering their services at dramatic discounts, Verizon has nevertheless doubled down on its strategy to focus on quality.

The rollout of 5G service is the pinnacle of Verizon's corporate strategy, and early indications are favorable. In the meantime, Verizon has held on to its big lead in subscribers who are billed for services after they use them, and although it hasn't been able to grow its customer base as much as smaller players, it's widened its lead over AT&T (T -0.43%). With favorable tax rates boosting profits, Verizon's looking to carry forward momentum into 2019.

Chevron

Like ExxonMobil, Chevron has seen a lot of pressure from falling crude oil prices. Yet many remain bullish on Chevron. The company continues bringing in a huge amount of cash, and Chevron deploys the money in a balanced way, spending some on stock buybacks while reinvesting a large portion of it in efforts to expand its production capacity. Even with low oil prices, Chevron's mix of projects gives it the ability to stay cash-flow positive in weaker industry conditions than many of its peers can withstand, and that could work well if oil prices stay low for a while.

Chevron isn't without risk, but its middle-of-the-road course is neither dangerously aggressive nor overly cautious. That's the attitude that you'd expect an industry-leading company to take, and Chevron's been through enough cycles in the oil industry to know how to endure the ups and downs.

Pfizer

Healthcare stocks did well in 2018, and Pfizer's 25% returns were noteworthy. Investors have been impressed with the way that Pfizer has built up what's rapidly becoming one of the top pipelines in the business. The company's Eliquis treatment is poised to become one of the top five sellers in the world, and its cancer treatment Ibrance has also established itself as a big winner.

Pfizer has ambitious plans for 2019. New CEO Albert Bourla said he intends to keep boosting dividends and making stock repurchases, but he's also looking for smart deals to advance Pfizer's overall strategic vision. But rather than making acquisitions for their own sake, the drug giant will look merely at opportunities to flesh out Pfizer's pipeline of drugs in late-stage clinical trials -- with the hope of sustaining sales growth indefinitely into the future.

Coca-Cola

Coca-Cola is dealing with changes in consumer tastes, which have forced it to pivot to products quite different from the ones that gave the beverage giant its initial success. Sugary sodas just aren't as popular as they once were, and Coca-Cola's been forced to respond by adding a large variety of different products such as sparkling and still water, juice, tea, and energy drinks to cater to a wider audience and evolving demand for healthier goods.

From a corporate perspective, Coca-Cola's latest move to refranchise its bottling operations is aimed to boost margins and leave the company with a more capital-light business model. That's put pressure on revenue, but earnings have been solid, and the beverage giant has been able to sustain its long streak of dividend increases. As a solid defensive play, Coca-Cola stock appeals to those who fear a continued downturn for the overall stock market.

JPMorgan Chase

Financial stocks have seen big ups and downs lately. For most of last year, JPMorgan Chase saw its stock move higher as conditions in the industry improved. Rising interest rates seemed poised to help the banking giant boost its interest income. Yet by the end of the year, fears of an economic recession put the brakes on the big bank's growth, and the stock ended up losing ground for 2018 as a whole.

Even with those challenges, though, JPMorgan Chase continued to dominate with a massive boost to its dividend payout. The Wall Street bank has worked hard to restore its dividend to levels similar to what it paid before the financial crisis in the late 2000s, and a 43% increase to the quarterly payout in 2018 succeeded in getting its yield high enough to qualify for the Dogs in 2019. That's something JPMorgan wants to keep doing, and it's excited about the prospects to add further stock buybacks to its return of capital to shareholders.

Procter & Gamble

Procter & Gamble is a perennial defensive stock, but it's been going through some revenue-related pain. The consumer goods colossus has struggled to keep organic sales growing in recent years, as increasing competition and rising raw materials costs combined to put pressure on profits.

Yet 2019 looks more promising. P&G has worked to capture market share back from its rivals, and early indications from recent quarters suggest the strategy is working. Moreover, lower tax rates and efforts to cut costs elsewhere have paid off with healthier earnings. With early projections for the current fiscal year that include accelerating growth in revenue and net income, Procter & Gamble looks poised to return to its role as a leader in the global consumer products industry.

Cisco Systems

Cisco Systems enjoyed solid gains over the past year, driven by continued demand for networking solutions to take advantage of innovations like cloud computing and data analytics. With so much value to reap from managing information well, Cisco's been able to use its expertise in the field to come up with useful solutions for clients. Even with plenty of competition in the networking space, there's been enough business to go around for everyone, and Cisco's pulled in its fair share.

But Cisco isn't content with its current status. The company's looking at strategic moves to bolster its position in the industry, spending $660 million to purchase silicon photonics specialist Luxtera. Silicon photonics technology helps Luxtera build optical technology that Cisco hopes to improve its data center business, making it more valuable for enterprise customers and helping to incorporate integrated optics capabilities more fully in its platforms. Cisco will still need to work hard to take advantage of the upcoming 400-gigabit upgrade cycle, but bulls are optimistic about its prospects.

Merck

Finally, Merck was the big winner in the Dogs in 2018, jumping 40%. The company was able to take full advantage of tailwinds for the pharmaceutical sector, which managed to avoid the potentially devastating regulatory restrictions that some had feared lawmakers might impose on the drug giant. Yet even with the huge gain, Merck's dividend yield had been large enough coming into 2018 that it still managed to stay on the list this year.

Merck's big gains recently have come from cancer treatment Keytruda, which improves the survival odds for chemotherapy patients. Keytruda has the potential to become a true blockbuster drug for Merck, and many think it can emerge as an industry leader even as rivals look to come up with similar treatments to address the disease. Combined with a stable of other solid revenue generators, Merck has the ability to help drive the Dogs of the Dow higher this year.

Keep your eyes on the Dogs of the Dow

The Dogs of the Dow's biggest advantages as a stock investing strategy are its simplicity and its use of high-profile, high-quality stocks. By mining the Dow's top dividend stocks, the Dogs are already pre-screened to include only the giants of their respective fields. By using a simple yield-based selection system, there's no guesswork involved with the Dogs.

Regardless of whether the Dogs of the Dow outperform their Dow Jones Industrials in 2019, investors who follow the strategy will get the benefit of solid dividend income and great prospects for growth. That's all any stock investor can ask for, and it'll be interesting to see how well the Dogs do in 2019 after a good showing last year.