Not that anything about 2020 was normal, but a long-tenured, stock-picking approach failed last year -- big time. The so-called Dogs of the Dow strategy meant to identify undervalued blue chips underperformed the very narrow index from which it draws its picks.

Then again, that can't come as a complete surprise. These gimmicks sound reasonable enough on the surface. At the end of the day, though, nothing replaces good ol' common sense.

What are the Dogs of the Dow?

If you're not familiar with the premise, it isn't complicated. The Dogs of the Dow are the 10 Dow stocks sporting the highest dividend yields at the end of any given year. Buy them at the beginning of the next year and you should -- theoretically anyway -- outperform the Dow Jones Industrial Average that year.

A pack of hunting dogs in a field ringed by trees.

Image source: Getty Images.

The idea makes enough sense. Assuming things eventually return to the mean, high-dividend yielding stocks will ratchet down their relative payouts by improving their prices.

The only problem? It doesn't work well enough and reliably enough to bet on every year.

That's not to say it doesn't work at all. It has its moments. The website crunched the numbers to find the Dogs of the Dow's average annual return for the 10-year stretch between 2009 and 2019 was 15.9% versus an average annual gain of 13.9% for the Dow overall. Not bad. If you shrink that look to just the five-year span between 2015 and 2019, however, the average Dogs of the Dow yearly gain of 13.4% is more or less in line with the Dow's 13.3% average annual gain. Looking back further in time reveals the Dogs' performance essentially mirrors, rather than exceeds, the Dow's overall returns. With truly long-term lookbacks, the Dogs even lag the Dow Jones Industrial Average's long-term performance.

Perhaps worse, when it fails, the approach can fail in a major way.

2020's Dogs were all bark, no bite

Last year's performance is a big reminder of this reality. Take a look at the performance comparison. The Dow Jones Industrial Average netted a 7.2% gain for 2020, while the Dogs lost 12.7% of their value. This one bad year would have wiped away years' worth of any outperformance an investor might have enjoyed by employing the Dogs of the Dow strategy.

2020's Dogs of the Dow Dividend Yield
as of End of 2019
% Change
Dow (NYSE:DOW) 5.12% 1%
ExxonMobil (NYSE:XOM) 4.99% (40.9%)
IBM (NYSE:IBM) 4.83% (6.1%)
Verizon (NYSE:VZ) 4.01% (4.3%)
Chevron (NYSE:CVX) 3.95% (29.9%)
Pfizer (NYSE:PFE) 3.88% (6%)
3M (NYSE:MMM) 3.26% (0.9%)
Walgreens-Boots Alliance (NASDAQ:WBA) 3.10% (32.4%)
Cisco (NASDAQ:CSCO) 2.94% (6.8%)
Coca-Cola (NYSE:KO) 2.89% (0.9%)
Merck (NYSE:MRK) 2.68% (10.1%)
2020's Dogs of the Dow (avg.) 3.90% (12.7%)
Dow Jones Industrial Average Index 2.60% 7.20%

Data source:

If you looked carefully, you might have noticed there are actually 11 Dogs listed for 2020. There were only 10 to start, but when Pfizer and ExxonMobil were removed from the Dow Jones Industrial Average in August, they were replaced with new names. Amgen was added to the Dow to ultimately become a 2021 Dog (more on that below). So, both stocks are considered in the above calculation. It wouldn't have changed the Dogs' 2020 performance much either way.

No free lunch on Wall Street

Last year's poor performance of the Dogs of the Dow stock-picking approach highlights the big flaw in any such methodology. That is, the stock market has a funny way of eventually throwing a curve ball just to remind investors there's no blind, mechanical way of successfully choosing the right stocks. There's always more to the story than the status of 30 equities at the end of the calendar year.

That's not to say a systematic approach like this one doesn't have value. In many respects, the Dogs of the Dow approach requires discipline. A lack of it is usually what causes investors the most trouble and costs them the most money. As a means of generating trade ideas, the Dogs of the Dow isn't necessarily a bad place to start.

The theory looks past one important reality, though. That is, sometimes -- like when a pandemic is sweeping across the world -- you may not want to be in the market at all. At other times, you may want to make a point of overweighting consumer staples stocks or even overloading on technology names that make working from home a possibility.

Last year was also a reminder that a year can be a long time to hold anything. The Dogs of the Dow strategy essentially requires you to hold a group of stocks for one exact calendar year, but the stock market doesn't move or change with respect to the calendar.

2021's Dogs

Still interested in the idea? If you are, here's the rundown of 2021's Dogs of the Dow.

2021's Dogs of the Dow Dividend Yield as of Dec. 31, 2020
Chevron 6.11%
IBM 5.18%
Dow 5.05%
Walgreens-Boots Alliance 4.69%
Verizon 4.27%
3M 3.36%
Cisco 3.24%
Merck 3.18%
Amgen (NASDAQ:AMGN) 3.06%
Coca-Cola 2.99%


Again though, be wary of blind approaches to choosing stocks. You'll see a lot of names that didn't earn their way off the list last year. In fact, the only name no longer a Dog is ExxonMobil, but it hardly performed its way off the list. It just suspended its dividend, lowering its yield.

It begs the question: Has anything changed enough in the meantime to prompt fresh bullishness from these 10 names? It would be tough to answer the question with a definitive "yes." Oil and industrial names -- not to mention old-tech and many pharma names -- aren't exactly positioned for the new, post-COVID normal.

The bigger point is, know that the best stock-selection methodology is still using your brain to apply a little common sense.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.