Dogs of the Dow: Does This Strategy Make Sense?

Investing is a lot like religion.

They both rely on faith, they both have rituals, and to the outside observer, there are aspects of it that don’t seem to follow intuition or expectation.

With investing, you also mix in a bit of gambling that many people seem to enjoy on their own. Like a modern-day gold rush, the stock market can seem very exciting when you consider you can invest in companies that move significantly in a short period. Mix in options, derivates, and other esoteric investments and you now get into true gambling territory.

Like anything with gambling, people are always looking for an edge. A tip. A hint. Anything to give them a little boost.

What’s fun about investing is that takes on the form of technical indicators. These are when stock prices move in such a way that believers think there is a higher likelihood a stock moves up or down as a result. For those gamblers investors, they rely on those indicators to give them an edge. By seeing a pattern, such as a Cup and Handle, they believe a stock will perform a certain way at a much higher percentage than without the pattern.

The fun happens, at least for me, when these things start getting names. And one of my favorites is not a technical indicator but a picking strategy called the Dogs of the Dow. I suspect part of the appeal is in its simplicity.

Table of Contents
  1. What are the Dogs of the Dow?
  2. How Effective are Dogs of the Dow?
  3. How Should You Use The Dogs?
  4. 2021 Dogs of the Dow

What are the Dogs of the Dow?

The Dogs of the Dow is the term used for the investment strategy that tries to beat the Dow Jones Industrial Average by picking the ten highest yielding companies in the Dow. It was first coined in 1991 by Michael B. O’Higgins in his book, “Beating the Dow.” The book as since been revised and republished in 2011.

As you may know, the Dow Jones Industrial Average index consists of only thirty companies. The Dogs of the Dow selects the ten highest dividend-yielding companies of that thirty.

There is also a Small Dogs of the Dow, which are simply the five lowest-priced per share of the ten Dogs of the Dow.

The basic premise of why the Dogs of the Dow works is that you are taking blue-chip companies and selecting the ones that may be a bit out of favor. They’re “a bit out of favor” because their higher dividend yield could be a product of a deflated stock price. This makes a big assumption that they should all yield about the same and that they will continue to yield the same, on a relative basis, despite economic conditions (because they’re blue-chip companies).

The assumptions are a bit of a stretch and there are quite a few of them but that hasn’t stopped its adherents. But it’s not too much different than Dividend Aristocrats or other filtering criteria.

It’s a very simple system to execute… but does it work?

How Effective are Dogs of the Dow?

There’s a website dedicated to the Dogs of the Dow and they’ve research how it has performed compared to various indices. On data spanning the end of 1999 through the end of 2018, the Dogs of the Dow have had a return of 9.0%.

By comparison, the Dow Jones Industrial Average has had a return of 7.5%. The Dogs of the Dow have outperformed the broader DJIA.

That said, the Dogs of the Dow have lagged the broader DJIA for 2019. It may have done well over 20 years but this past year it’s lagged significantly (12.9% for the Dogs vs. 19.5% for the DJIA through 12/11/2019).

The tricky part, and this may be an unfair comparison, is that the S&P 500 and the DJIA are very different indices. As of 12/11/2019, the S&P 500 has gained 25% while DJIA has gained just 19.5%.

If you’re allocating the stock portion of your portfolio, are you better off investing in the Dogs of the Dow or just sticking it in an index fund?

How Should You Use The Dogs?

Never buy a company simply because it fits a strategy!

I would treat these companies similar to how I treat Dividend Kings and Dividend Aristocrats, use it as a starting point for your research. Dig deeper into the financials to find out why these companies have a higher yield compared to their blue-chip peers. See what their prospects are and if you want to be on board with the company, not just because they’re on a list with a funny name.

If you only invested in Dogs of the Dow, you would’ve missed investing in the S&P 500, which is far simpler and less gimmicky.

So use it as a starting point but don’t go all-in on this strategy.

2021 Dogs of the Dow

The Dogs of the Dow are simple to find, just take the thirty companies in the DJIA and sort them by dividend yield on the last day of the year.

For 2021, the Dogs of the Dow were (alphabetical order):

  • 3M
  • Amgen
  • Chevron
  • Cisco Systems
  • Coca-Cola
  • Dow
  • IBM
  • Merck
  • Procter & Gamble
  • Walgreens

If you look at that list, it’s a who’s who of blue-chip companies.

We will update this list with the 2022 Dogs of the Dow when the year ends.

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About Jim Wang

Jim Wang is a forty-something father of four who is a frequent contributor to Forbes and Vanguard's Blog. He has also been fortunate to have appeared in the New York Times, Baltimore Sun, Entrepreneur, and Marketplace Money.

Jim has a B.S. in Computer Science and Economics from Carnegie Mellon University, an M.S. in Information Technology - Software Engineering from Carnegie Mellon University, as well as a Masters in Business Administration from Johns Hopkins University. His approach to personal finance is that of an engineer, breaking down complex subjects into bite-sized easily understood concepts that you can use in your daily life.

One of his favorite tools (here's my treasure chest of tools, everything I use) is Empower Personal Dashboard, which enables him to manage his finances in just 15-minutes each month. They also offer financial planning, such as a Retirement Planning Tool that can tell you if you're on track to retire when you want. It's free.

>> Read more articles by Jim

Opinions expressed here are the author's alone, not those of any bank or financial institution. This content has not been reviewed, approved or otherwise endorsed by any of these entities.

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4 years ago

I’m more a believe in buying a broader diversified basket of stocks than just 10 dogs of the dow. I think what this is really getting at is applying what is called value factor investing. There certainly are large cap value “indexes” like VTV or RPV, etc. that apply similar philosophies with greater diversification. Also, as you mention, dividend oriented funds such as VIG or VYM would be composed of similar types of stocks. I, personally, wouldn’t place a giant bet on just 10 stocks. I know I’m not Warren Buffet. But value investing is a factor type that over… Read more »

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