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Dogs Of The Dow

What Is "Dogs Of The Dow"?

The Dogs of the Dow is an investment strategy that involves buying the 10 stocks in the Dow Jones Industrial Average (DJIA) with the highest dividend ratios relative to their price. The term "dogs" derives from a similar strategy that calls for investing in the 10 worst performing stocks in the Dow from the previous year. Generally, though, the stocks in both lists are usually the same ones, and the term Dogs of the Dow has now come to mean the 10 biggest dividend payers.[1]

The strategy was popularised by Michael B. O'Higgins, president and chief investment officer at O'Higgins Asset Management in Miami Beach, Florida, in his 1991 book, Beating the Dow, although the idea predates that.[2]

The thinking behind the strategy is that the 10 "dogs" are likely to rebound the following year while providing investors with high dividends. And since all of the stocks, by virtue of being included in the DJIA, are widely considered to be safe "blue chip" investments, the strategy is relatively lower risk than investing in other stocks.

Small Dogs of the Dow

If you don't have a substantial amount to invest, there is a smaller group of five stocks called the "Small Dogs of the Dow." This group is comprised of the five Dogs with the lowest prices at the end of the previous year.

Performance

Both strategies have generally outperformed both the Dow itself as well as the S&P 500.

According to the website DogsofTheDow.com, both the Dogs and the Small Dogs have outperformed those two benchmarks in most of the past five years as well as longer term.
In 2018, for example, the 10 Dogs returned 0.0% and the Small Dogs returned 0.8%. However, that was better than the 3.5% loss in the Dow and the S&P 500's 4.4% decline.[3]

Over the longer term, both the Dogs and the Small Dogs have largely outperformed the Dow and the S&P 500. Since 2000, the Dogs and the Small Dogs have returned a respective 9.0% and 10.0% annually, well ahead of the respective 7.5% and 6.4% returns for the Dow and S&P. From 2011 to 2018, the Dogs and the Small Dogs returned an annual 15.6% and 15.9%, respectively, compared to 13.6% for the Dow and 13.7% for the S&P 500.[3]

2019 Dogs And Small Dogs

The list of Dogs and Small Dogs changes every year, depending on where they rank the previous year in terms of dividend ratios. Here is the list of the 2019 Dogs and Small Dogs, based on their year-end 2018 dividend yields.

Dogs of the Dow, ranked by their year-end 2018 dividend yields:

  • IBM 5.5%
  • Exxon Mobil 4.8%
  • Verizon 4.3%
  • Chevron 4.1%
  • Pfizer 3.3%
  • Coca-Cola 3.3%
  • JPMorgan Chase 3.3%
  • Procter & Gamble 3.1%
  • Cisco 3.1%
  • Merck 2.9%

Small Dogs of the Dow, ranked by their year-end 2018 prices:

  • Exxon Mobil US$68.19
  • Verizon US$56.22
  • Coca-Cola US$47.35
  • Pfizer US$43.65
  • Cisco US$43.33

Advantages And Disadvantages Of The Dogs

As we've seen, investing in the Dogs and Small Dogs has several advantages: They pay high dividends; they're strong, well-known companies and relatively low risk; and they have a good long-term track record of beating the overall market. Investing in high dividend stocks can also be an alternative to investing in bonds, with the possibility of price appreciation.

However, this type of strategy doesn't always work. Immediately after the global financial crisis, for example, financial stocks were among the highest dividend payers but did poorly for many years, with many of them cutting their dividends and keeping them low over the next several years.

Likewise, growth stocks often do better than high-dividend stocks in terms of price appreciation even though they don't always pay high dividends.[1]

Summary

The Dogs of the Dow is an investment strategy that involves buying the 10 stocks in the Dow Jones Industrial Average with the highest dividends. The strategy has a good long-term track record of outperforming the Dow and the S&P 500 although it doesn't beat them every year. An offshoot of the Dogs strategy is the Small Dogs, which involves investing in the five Dogs with the lowest stock prices.

Past Performance is not an indicator of future results.