The stock market has been fast and furious so far in 2020, with a huge bear market drop in the first quarter giving way to a significant recovery for stocks in the second quarter. Even with the big bounce, though, the Dow Jones Industrials (^DJI -0.12%) are down almost 10% on the year.
Many investors look for ways to avoid the volatility in the stock market, and one reasonably conservative investment strategy involves purchasing the 10 dividend stocks that make up the Dogs of the Dow. Yet even though the strategy has done fairly well over the long haul, 2020 has been a disaster for the Dogs of the Dow so far, and it's unclear whether the pressures that have held back the strategy will let up anytime soon.
2020: Dogs of the Dow vs. Dow Jones
|
Investment |
Price Change in 2020 Year to Date |
|---|---|
|
Dow Jones Industrials |
(9.5%) |
|
Dogs of the Dow |
(18.4%) |
Data source: Yahoo! Finance. As of July 2.
Your introduction to the Dogs of the Dow
The Dogs of the Dow strategy is attractive to many investors because of its simplicity. All you have to do to use the strategy is to look at the 30 stocks in the Dow Jones Industrials at the beginning of the year. Look up the dividend yields for each, and then put them in order from highest yield to lowest. The top 10 yielding dividend stocks in the Dow become the Dogs of the Dow for the coming year. The strategy has you invest equal amounts in all 10 stocks and then do nothing for the remainder of the year.
In past years, many Dog stocks end up posting good returns. Often, the reason a stock's yield is high enough to make the Dogs is that its stock price took a temporary hit. Because the companies in the Dow Jones Industrials are mature businesses that have experience bouncing back from adversity, they often rebound relatively quickly and deliver strong performance the following year.
Image source: Getty Images.
The 2 main reasons the Dogs of the Dow are playing dead
There are a couple primary things that stand out in the performance of the Dow compared to the Dogs. First and foremost, not one of the 10 Dog stocks is up on the year. That means the Dogs have missed out on the superlative performance of tech giants Microsoft (MSFT -0.66%) and Apple (AAPL -0.81%), which are up 31% and 24% respectively so far in 2020. Not a single one of the top 10 performers this year is a Dog stock.
It's been a good year for high-growth stocks in the tech industry, but it's been an extremely bad one for some of the sectors that are overrepresented among the Dogs. The most notable laggard is the energy sector, where both Chevron (CVX 0.08%) and ExxonMobil (XOM -0.05%) rank among the biggest losers in the average. Only non-Dog aerospace giant Boeing has fallen more than ExxonMobil has. Investors fear that even big-name energy stocks might have to cut their dividends at some point, especially if crude oil prices fail to recover more ground than they have.
Also, some Dog stocks simply aren't matching up to the competition. In the drugstore retail space, Walgreens Boots Alliance (WBA -0.06%) has lost more than twice the ground that rival CVS has, and Rite Aid has managed to put up a sizable gain for the first half of the year. Similarly, Pfizer (PFE -1.05%) and Merck (MRK 0.25%) have just about entirely missed out on the bull market in some healthcare stocks that are more closely linked to potential COVID-19 pandemic solutions.
What will the second half of 2020 bring for the Dogs of the Dow?
With a nine percentage point gap, things look bad for the Dogs of the Dow in 2020. But there's plenty of uncertainty still in the markets. Even blue chip stocks have proven vulnerable to downdrafts in the stock market. If those downdrafts hit non-Dog stocks more sharply, then it could narrow the gap between the Dogs and the Dow Jones Industrials quickly.
