The Dow Jones Industrial Average (^DJI 0.40%) just broke 38,000 for the first time, and the S&P 500 is at a new all-time high, making a new bull market official.
What's the best investing strategy for 2024? Will growth stocks continue to reign, or are investors best off putting their money somewhere else?
One popular approach with the new year is the Dogs of the Dow strategy, a dividend-based approach popularized by money manager Michael B. O'Higgins in 1991.
According to the Dogs of the Dow strategy, investors should buy the 10 Dow stocks with the highest dividend yields each new year. The idea with this strategy is that since the Dow represents blue chips, you're buying solid companies that are trading at a discount, and therefore offer high dividend yields.
In 2024, the 10 Dogs of the Dow and their current dividend yields are:
- Verizon (VZ 1.17%): 6.8%.
- 3M (MMM 0.46%): 5.6%.
- Dow (NYSE: DOW): 5.3%.
- Walgreens (WBA 0.57%): 4.6%.
- Chevron (NYSE: CVX): 4.3%.
- IBM (NYSE: IBM): 3.9%.
- Coca-Cola (NYSE: KO): 3.1%.
- Cisco (NASDAQ: CSCO): 3%.
- Amgen (AMGN 0.22%): 2.9%.
- Johnson & Johnson (JNJ -0.46%): 2.9%.
Data source: Yahoo! Finance.
So is it worth buying the Dogs of the Dow? Let's look at the history of the strategy and which of these stocks is worth holding.
Image source: Getty Images.
Does the Dogs of the Dow strategy work?
Since 2000, the Dogs of the Dow strategy has returned roughly 9.5% annually, making it about even with the S&P 500. The strategy also has the added benefit of offering a higher dividend yield than the broad-market index, which makes the strategy especially appealing for retirees and others who count on dividend income to support their lifestyle. A portfolio of the listed stocks split 10 ways would yield more than 4%, significantly better than the S&P 500's 1.5% yield.
However, there are also flaws with the Dogs of the Dow strategy, as it tends to include chronic laggards, and one of the stocks on the list, Walgreens, already slashed its dividend by 48%, proving that even dividends in the blue-chip index aren't safe.
Over the past five years, none of the 10 stocks in this year's Dogs of the Dow beat the S&P 500 on a price-appreciation basis, and three of the 10 -- Walgreens, Verizon, and 3M -- actually lost money during that time, even as the S&P 500 jumped 72%.
A better way to invest in the Dogs of the Dow
Rather than investing blindly in all 10 Dogs of the Dow, a better way is to use the list as a starting point and buy the stocks that look the most promising.
Right now, Walgreens and 3M, which have both struggled with structural challenges in their respective industries, look best avoided. Walgreens has tried to pivot away from being a pure-play pharmacy business and run up a large debt burden as a result of acquisitions. It's also faced declining sales as demand for COVID vaccines has fallen. 3M, meanwhile, recently settled two multibillion-dollar lawsuits, which will be a drag on its profits for years, and the company is facing cyclical headwinds that seem likely to persist.
On the other hand, Verizon is the top-yielding stock on the Dow and looks to be finally emerging from a long slump as its capital investment cycle has peaked. Johnson & Johnson also seems like a reliable bet after spinning off the Kenvue consumer-goods business, leaving investors with the faster-growing medical devices and pharmaceuticals business. Biotech company Amgen looks like a solid bet as well. Its portfolio of drugs, which include an osteoporosis treatment, should benefit from an aging baby boomer population. It also looks reasonably valued at a price-to-earnings ratio of 22.
Why the Dogs of the Dow could be a winner this year
There's one reason to think the Dogs of the Dow as a whole might do better this year: Falling interest rates tend to be good for dividend stocks because they make dividend yields more attractive relative to bonds. If the Federal Reserve lowers rates this year, as expected, and bond yields fall, we could see investors rotate from bonds back into high-yield stocks.
