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How Coronavirus Bit This Popular Stock Strategy

By Dan Caplinger - Mar 16, 2020 at 8:32AM

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A simple, conservative method for investing is doing surprisingly poorly. Find out why.

2020 will be a historic year, with the COVID-19 outbreak sparking an extremely fast and sharp stock market drop into bear market territory. Even after the losses that investors have seen, there's still plenty of uncertainty about what the future will hold. Even the blue chip stocks in the Dow Jones Industrials (^DJI 0.00%) have suffered significant losses, with every single one of the 30 stocks in the average down for the year as of March 13.

Defensively minded investors have often turned to a simple strategy that's easy to follow and has often offered some protection from downturns in the past. But the coronavirus has been highly disruptive to many investing strategies. The Dogs of the Dow have a solid track record, but they don't win every single year, and at least so far, the strategy's ability to outpace the broader average in 2020 is in great doubt. Let's take a closer look to find out why.

How the 2020 Dogs of the Dow have fared


Price Change in 2020 Year to Date

Dow Jones Industrials


Dogs of the Dow


Source: Yahoo! Finance. As of March 13.

What are the Dogs of the Dow?

In order to follow the Dogs of the Dow strategy, all you have to do is look up which 10 stocks in the Dow Jones Industrials had the highest dividend yields at the beginning of the year. Once you know those 10 stocks, the strategy has you divide your portfolio into 10 equal parts and invest the same amount in all 10 of the Dogs of the Dow.

The basis for the Dogs of the Dow method is the belief that stocks fall out of favor one year are good prospects the next, and that companies paying substantial dividends offer some added protection compared to those with lower dividend yields. That's been true more often than not lately, with the annual return of the Dogs beating out the broader Dow in seven of the past 10 years.

Black dog on a pile of money, with a hundred dollar bill in its mouth.

Image source: Getty Images.

What's hurting the Dogs in 2020?

A few major trends are largely responsible for the Dogs' underperformance so far this year:

  • Oil prices have been weak for some time, and that put both ExxonMobil (XOM 2.23%) and Chevron (CVX 1.20%) into the Dogs again in 2020. With the most recent plunge in crude, both of those stocks have been terrible performers, losing 45% and 31% respectively year to date.
  • Top-yielding Dow Industrials stock Dow Inc. (DOW) has been the worst performer in the average. The chemicals industry worldwide has seen demand fall dramatically due to coronavirus-driven fears, and Dow's extensive debt has put it in a potentially vulnerable position if the economy falls into a deep recession.
  • Many traditionally defensive stocks, such as consumer goods and retail, had already seen significant gains in 2019 and therefore weren't among the Dogs of the Dow. They haven't escaped losses entirely, but they have had smaller declines than most of the Dogs as those who fear COVID-19's influence move into companies that sell essentials and have less exposure to the business cycle.

In addition, the equal-weight method the Dogs of the Dow strategy uses has hurt its performance. Only three of this year's Dogs have share prices above $100, and that makes their influence on the price-weighted Dow Jones Industrial Average minimal. For instance, ExxonMobil's 45% drop gets a weighting of 10% in the Dogs, but only 1.1% in the broader benchmark.

Can the Dogs catch up?

We're less than three months into 2020, so obviously, there's a lot of time for the Dogs of the Dow to regain some of their losses. To do so, though, it'll take major reversals of several key trends like the declines in energy and materials stocks. A solution to the COVID-19 pandemic could bring such a reversal. Alternatively, it's possible that if the rest of the Dow Jones Industrials see further losses, it could eliminate the advantage that the broader average of blue chip stocks has had so far this year.

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Stocks Mentioned

Exxon Mobil Corporation Stock Quote
Exxon Mobil Corporation
$87.55 (2.23%) $1.91
Chevron Corporation Stock Quote
Chevron Corporation
$146.51 (1.20%) $1.73
DuPont de Nemours, Inc. Stock Quote
DuPont de Nemours, Inc.
Dow Jones Industrial Average (Price Return) Stock Quote
Dow Jones Industrial Average (Price Return)
$30,775.43 (0.00%) $0.00

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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