Investors are always looking for the best returns to reach their financial goals. One strategy, built on investing in the highest-yield blue-chip stocks in the Dow Jones Industrial Average (DJ INDICES:^DJI), is the "Dogs of the Dow." In this article, we will discuss the strategy, how it works, the current components, and provide some examples.
What is Dogs of the Dow?
"Dogs of the Dow" is an investing strategy that aims to generate better returns than the Dow while also presenting lower risk than other stock-picking strategies. Using this strategy, one invests in the 10 highest-yielding stocks in the Dow Jones Industrial Average and then reallocates the portfolio annually to the new highest-yielding Dow stocks. The term "dogs" refers to the strategy of looking for the highest-yield Dow stocks, which are typically the ones that are viewed as being out of favor with investors, or "in the doghouse."
The Dogs of the Dow strategy has gained in popularity since Michael O'Higgins' book, Beating the Dow, was first published in 1991. The idea behind this strategy is that investors can profit from the relative strength of Dow stocks and the opportunity to buy undervalued components using dividend yield as a proxy for valuation. The underlying thesis is that these "dogs" are often down for short-term reasons, and the market's overreaction has created an opportunity for contrarian investors.
To put it plainly, this is a contrarian, value stock strategy that eschews growth stocks and focuses on undervalued assets.
The 2024 Dogs of the Dow
Stock | Market Cap | Dividend Yield | Sector |
|---|---|---|---|
Walgreens NASDAQ:WBA) | $7.69 billion | 11.22% | Consumer goods |
Verizon (NYSE:VZ) | $181.89 billion | 6.14% | Telecommunications |
Dow (NYSE:DOW) | $37.53 billion | 5.24% | Materials (chemicals) |
Chevron (NYSE:CVX) | $273.08 billion | 4.36% | Energy |
Johnson & Johnson (NYSE:JNJ) | $388.36 billion | 3.09% | Consumer goods |
Cisco (NASDAQ:CSCO) | $214.64 billion | 2.99% | Technology |
IBM (NYSE:IBM) | $214.61 billion | 2.85% | Technology |
Amgen (NASDAQ:AMGN) | $173.18 billion | 2.79% | Healthcare |
Coca-Cola (NYSE:KO) | $299.85 billion | 2.79% | Consumer goods |
Merck (NYSE:MRK) | $279.24 billion | 2.79% | Healthcare |
The bottom line
While the Dogs of the Dow strategy has delivered modest outperformance of the Dow Jones Industrial Average and the S&P 500 over various periods of time in the past, its results from year to year can be spotty. This is why proponents recommend investors who adopt it use it as a long-term strategy. Unfortunately, the short-term nature of its methodology -- selling off holdings each year to rebalance to the new Dogs -- can undermine the results, particularly for investors who are not using tax-deferred investing accounts such as IRAs.
And, while this is a very simple -- even elegant -- strategy on the surface, its reductive nature of concentrating to only 10 stocks can make it riskier than one might think. Filtering to blue-chip stocks in the Dow helps lower this risk to some extent but certainly doesn’t eliminate it.
Whether the Dogs of the Dow strategy makes sense for any investor is a very personal decision. While it has strong advocates who tout past successes, its future results may or may not generate the returns investors expect.
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