The stock market has had a lukewarm performance in 2015, with the Dow Jones Industrial Average (^DJI 0.23%) entering the final day of the year lower than where it began. Yet there's a simple dividend strategy called the Dogs of the Dow that has outperformed the venerable average in four of the past five years. Let's take a closer look at the methodology behind this strategy and whether it managed to outdo the Dow in 2015.
Dogs of the Dow: Not just all bark and no bite
The nicest thing about the Dogs of the Dow strategy is that it's easy to follow. At the beginning of each year, you can find the Dogs by ranking Dow stocks by dividend yield and taking the top 10. Buy equal amounts of each stock and hold them all for the full year. By the end of the year, different stocks will be among the top dividend payers, and you can buy and sell to create the next year's list.
This strategy combines elements of dividend and value investing. Among the Dow's blue chips, high yields tend to come from temporary downturns in share prices, and so the Dogs typically include beaten-down stocks in the average. When those stocks rebound in the following year -- as they often have -- it lifts the Dogs to a greater extent than the broader Dow average.
Past years have shown the success of that dynamic between value and dividend investing. In 2014, Intel was among the Dogs of the Dow, and it was the top performer in the Dow, rising 40% on a combination of a renewed interest in PCs and further hopes that the chip giant would finally get itself into the mobile-chip game. Hewlett-Packard was an even better example during the previous year, as the beleaguered computer-hardware stock nearly doubled in 2013 as it recovered from the fallout of its disastrous purchase of British software company Autonomy and a resulting $8.8 billion writedown.
How did the Dogs do in 2015?
You can see some signs of that same dynamic playing out this year. McDonald's (MCD -0.54%) is the best performer among the Dogs, returning 28% as investors become more confident that the fast-food giant can find a way forward in an industry that has increasingly been dominated by fast-casual chains. McDonald's move to offer all-day breakfast has reawakened interest in the stock, and a 3% yield has been icing on the cake for investors this year.
Yet some potential turnarounds have taken longer to surface. Energy stocks Chevron (CVX 1.65%) and ExxonMobil (XOM 1.45%) were both among the Dow Dogs in 2015, as the late-2014 drop in crude oil prices sent their share prices lower and their dividend yields up to begin the year. Yet the slump in energy has lasted throughout the year, and many fear that even now, oil and natural gas prices might not have reached their lowest points. As a result, both stocks are down between 15% and 20% on the year.
The net result is that the Dogs of the Dow are just barely ahead of the Dow Jones Industrials in 2015, posting a nearly flat return and topping the broader average by less than a percentage point. That's similar to what happened in 2014, when the Dogs' return of just under 11% eked out a win over the Dow's 10% gain.
As 2016 begins, dividend investors might want to take a closer look at the Dogs of the Dow. The strategy doesn't always pay off compared to the Dow Jones Industrial Average's returns, but with higher yields and the prospect for less volatility among the names that often top the list, the Dogs of the Dow bring many benefits to investors with a certain mind-set toward risk and return.