What Are the Dogs of the Dow?

What Are the Dogs of the Dow?

Let me explain the Dogs of the Dow to you directly: it's an investment strategy designed to outperform the Dow Jones Industrial Average (DJIA) by focusing your portfolio on high-yield investments. You allocate your money to the 10 highest dividend-yielding blue-chip stocks from the DJIA's 30 components, and you rebalance this at the start of each calendar year.

Key Takeaways

This strategy gained prominence in 1991 and aims to maximize yield by selecting the top 10 dividend-paying stocks from the DJIA each year. Its track record indicates returns that closely follow the DJIA, though they can vary depending on the time period you examine.

Understanding the Dogs of the Dow

The DJIA is one of the oldest and most followed indexes, often serving as a gauge for the broader market, so it's no surprise that strategies like this one draw from its components. I follow the Dogs because it offers a straightforward method to perform in line with the Dow. The concept isn't entirely original, but it became widely known in 1991 with Michael B. O’Higgins’ book 'Beating the Dow,' where he also named it.

Dogs of the Dow Methodology

The strategy is based on the idea that blue-chip companies maintain steady dividends regardless of trading conditions, making the dividend a reliable measure of the company's value. Stock prices, however, fluctuate with business cycles. This means companies with high dividends relative to their stock price are likely at the low point of their cycle, so their prices should rise faster than those with lower yields. As an investor, you can reinvest in these high-yielders annually to potentially beat the market.

You have options for implementing this: pick individual stocks to build your portfolio, invest in Dow-focused ETFs, or strictly follow the Dogs strategy, which often provides better yields than the Dow overall and has outperformed it in some years.

How the Dogs of the Dow Strategy Works

This approach simplifies stock picking while keeping it relatively safe, limited to blue-chip stocks. Here's how it goes: after the market closes on the last day of the year, identify the 10 highest dividend-yielding stocks in the DJIA. Then, on the first trading day of the new year, invest equal amounts in each. Hold for a year and repeat the process annually.

Investing isn't always straightforward for nonprofessionals with so many strategies available, so understand what you're doing with your money. You'll find plenty of tools online—opinions, analyses, calculators, charts, and even a dedicated Dogs of the Dow website. As a low-maintenance, long-term strategy mirroring the DJIA, its results are similar, with the Dow sometimes outperforming and vice versa, but overall performance is solid.

Sample Performance Comparison

During the 2008 financial crisis, the Dogs suffered greater losses than the DJIA, but over the following decade, it only slightly underperformed the index. From 2013 to 2023, the Dogs delivered a trailing total return of 10.02% compared to the DJIA's 11.48%. Despite the 2008 setback, the strategy recovered well, showing respectable decade-long results similar to the DJIA. However, in the last five years from 2018 to 2023, it trailed more noticeably with 5.29% versus the DJIA's 8.39%.

Is There an ETF That Tracks the Dogs of the Dow?

No ETF directly tracks the Dogs by investing in the top 10 dividend performers, but similar dividend-focused options exist, like the Invesco Dow Jones Industrial Average Dividend ETF (DJD) and the ALPS International Sector Dividend Dogs ETF (IDOG).

What Companies Are in the Dogs of the Dow?

For 2023, the list includes Verizon, Dow, Intel, Walgreens, 3M, IBM, Amgen, Cisco, Chevron, and JP Morgan Chase.

How Are the Dogs of the Dow Chosen?

Selection is straightforward: the 10 DJIA companies with the highest dividend yields as of the year's last trading day make the cut.

The Bottom Line

While the Dogs have slightly underperformed the DJIA over the past 10 years, it remains a solid dividend strategy for those seeking fixed payments. If you're after pure returns, consider the DJIA or S&P 500 for long-term investing.