2023 was a great year for investors. However, those who favored the Dow Jones Industrial Average (^DJI 0.40%) over broader indexes weren't necessarily as happy, as the Dow's 14% rise trailed much more lucrative returns for the Nasdaq Composite and S&P 500.
For value-seeking investors, 2023 was even more disappointing. In particular, those following the popular strategy known as the Dogs of the Dow had to struggle through another year of underperforming the Dow and other major market indexes.
Here, you'll learn more about why the Dogs of the Dow didn't live up to their reputation in 2023 -- as well as why some investors are more optimistic about how 2024 could go.
Image source: Getty Images.
How the 2023 Dogs of the Dow fared
The 10 stocks in the 2023 Dogs of the Dow were chosen because they had the highest dividend yields among the 30 stocks in the Dow Jones Industrials as of the last day of 2022. All investors had to do was take those 10 stocks and invest equal amounts in each of them. Then, they held the stocks until the end of 2023.
High-dividend stocks tend to do better in market environments in which investors like value-oriented stocks. In particular, because the stocks in the Dogs of the Dow often join the list after a year of poor performance, they're more prone to rebound quickly when the broader investing community is looking for good values.
Unfortunately, that wasn't the case in 2023. Growth stocks rebounded after 2022's bear market. Three of the four worst performers in the Dow were among 2023's Dogs of the Dow, including the two stocks with the weakest overall returns.
2023 Returns: Dogs of the Dow vs. Dow Jones Industrials
|
Return for Dogs of the Dow |
Return for Dow Jones Industrials |
|---|---|
|
10.1% |
14.4% |
Data source: DogsoftheDow.com.
Indeed, some strong performers in 2022 fared poorly in 2023. Chevron (CVX 0.37%) did exceedingly well in 2022's bull market in crude oil and other energy products. However, a return to more normal conditions and steady drops in prices of petroleum and natural gas weighed on revenue and profits for Chevron.
Faring even worse was Walgreens Boots Alliance (WBA 0.57%), which was the Dow's worst performer, with losses of close to 30% on the year. A new emphasis on building a more comprehensive healthcare business that includes making primary care clinics available to customers at its store locations has hurt short-term financial results. New CEO Tim Wentworth hasn't yet been able to impose greater operational discipline, and adverse traffic trends amid less business related to COVID-19 have caused some shareholders to have uncertainty about the long-term direction Walgreens is taking.
Lastly, Verizon Communications (VZ 1.17%) has consistently been among the Dogs of the Dow because of the high dividend yields that telecom stocks have paid for years. The problem for Verizon in 2023 was that rising interest rates threatened the profits of the wireless giant, particularly given the massive debt load that the company has accumulated over time. Moreover, fears about lead-containing wireline cables raised the possibility of massive long-term legal liability, which pose at least some threat of having a negative impact on Verizon's ample dividend payouts.
Looking for redemption in 2024
With the underperformance, the Dogs of the Dow strategy has now done worse than the broader Dow Jones Industrials in four years out of the last five. Yet, many investors are hoping that a rotation in the stock market could favor value-oriented stocks in 2024. If that proves to be the case, it would be a good sign for the Dogs, which historically have done better in value-friendly market environments.
For many, though, the simplicity of the Dogs of the Dow strategy makes it worth occasional underperformance. Given the blue chip companies that the strategy selects, investors could certainly do worse than going with the 10 stocks in the Dogs of the Dow as a starting point for building a diversified portfolio.
