I have been watching stocks now for about 25 years and the Dow has always been something I have watched as a general indicator of the market even though it is only 30 stocks. A good investment strategy in uncertain times is the “Dogs of the Dow”.
What is the Dogs of the Dow Strategy?
So what is the “Dogs of the Dow Strategy”? The short answer is that the Dogs of the Dow investment strategy is a strategy for picking stocks that identifies undervalued blue chips believed to be ripe for favorable price adjustment. based on H. G. Schneider’s Article in the Journal of Finance in 1951 that used the price-earnings ratio. The general idea is that blue-chip companies that pay a dividend are more likely to withstand an economic downturn.
How does the Dogs of the Dow Strategy Work?
It is quite simple really. The ten stocks, out of the narrow Dow index, that have the highest dividend yield for the year at the end of the year, are christened the Dogs of the Dow. All you need to do is invest in them.
The premise is equally simple. In a market with choices, the expectation is that, mathematically at least, everything returns to the mean. Hence, stocks with dividend yields higher than the market last year could be considered to be undervalued and expected to improve their prices so that dividend yield moves down and moves towards the market mean.
So, if you have invested in the Dogs of the Dow at the start of the year, your portfolio should be outperforming the Dow Jones Industrial Average for that year. Theoretically at least.
Dogs of the Dow Stock List 2021
| Ticker | Company | Sector | Price | Ex-Dividend Date | Dividend Yield | Beta 3-Year | Consecutive Div. Growth Years | YTD Return | 3-Year Return |
| CAT | Caterpillar | Industrials | $232.68 | 1/19/2021 | 1.80% | 1.09 | 7 | 28.40% | 70.90% |
| CVX | Chevron | Energy | $106.14 | 2/16/2021 | 4.90% | 1.23 | 10+ | 27.40% | 6.60% |
| DOW | Dow | Basic Materials | $64.39 | 2/25/2021 | 4.40% | 1.34 | 1 | 17.20% | – |
| IBM | IBM | Technology | $134.73 | 2/9/2021 | 4.80% | 0.98 | 10+ | 8.40% | 1.50% |
| KO | Coca-Cola | Consumer Defensive | $53.18 | 3/12/2021 | 3.20% | 0.71 | 10+ | -2.20% | 35.20% |
| MMM | 3M | Industrials | $194.88 | 2/11/2021 | 3.00% | 0.85 | 10+ | 12.40% | -2.10% |
| PFE | Pfizer | Healthcare | $36.19 | 1/28/2021 | 4.30% | 0.67 | 10+ | -0.70% | 21.20% |
| VZ | Verizon Communications | Communication Services | $58.44 | 4/8/2021 | 4.30% | 0.48 | 10+ | 0.50% | 39.10% |
| WBA | Walgreens Boots Alliance | Healthcare | $53.16 | 2/18/2021 | 3.50% | 0.82 | 10+ | 34.50% | -10.20% |
| XOM | Exxon Mobil | Energy | $56.76 | 2/9/2021 | 6.10% | 1.05 | 10+ | 40.00% | -9.70% |
What happened in 2020?
If you are one who has been relying on this, fairly established for many years, strategy, 2020 would have been disastrous, and not just because of the pandemic. The strategy backfired like it has rarely backfired over many years.
While the Dow Jones Industrial Average gained 7.2% for the year, the Dogs delivered a negative return of 12.7%, a significant enough negative return to wipe out gains over the Dow, if any, over many years.
This is how it broke down:
| 2020’s Dogs of the Dow | Dividend Yield as of End of 2019 | 2020 % Change |
| Dow (NYSE:DOW) | 5.12% | 1% |
| ExxonMobil (NYSE:XOM) | 4.99% | (40.9%) |
| IBM (NYSE:IBM) | 4.83% | (6.1%) |
| Verizon (NYSE:VZ) | 4.01% | (4.3%) |
| Chevron (NYSE:CVX) | 3.95% | (29.9%) |
| Pfizer (NYSE:PFE) | 3.88% | (6%) |
| 3M (NYSE:MMM) | 3.26% | (0.9%) |
| Walgreens-Boots Alliance (NASDAQ:WBA) | 3.10% | (32.4%) |
| Cisco (NASDAQ:CSCO) | 2.94% | (6.8%) |
| Coca-Cola (NYSE:KO) | 2.89% | (0.9%) |
| Merck (NYSE:MRK) | 2.68% | (10.1%) |
| 2020’s Dogs of the Dow (avg.) | 3.90% | (12.7%) |
| Dow Jones Industrial Average Index | 2.60% | 7.20% |
DATA SOURCE: DOGSOFTHEDOW.COM
As a technical detail, there are 11 stocks visible in the Dogs of the Dow list. This is because Pfizer and ExxonMobil were removed from the Dow Jones Industrial Average and were replaced by new names, while Amgen was added. But, either ways, the Dogs’ performance would not be much different.
The Dogs of the Dow were the Dogs of the Dow because they had a combined dividend yield of 3.9% for 2019 against 2.6% for the Index. But that did not much help the investment strategy, did it?
Historical returns from the strategy
| Dow Jones Industrial Average (average annual return) | Dogs of the Dow (average annual return) | |
| Between 2009 and 2019 | 13.9% | 15.9% |
| Between 2015 and 2019 | 13.3% | 13.4% |
If we go further back in time, the Dogs’ mostly seem to match the performance of the Dow, rarely exceeding, and occasionally lagging. Moreover, failures of the strategy, when they have happened, have been significant.
Is the strategy flawed?
It is not that this is a faulty approach. If you have money to invest but not the skills or time to undertake detailed analysis, this can be a good starting point.
The problem is that stock-picking is not a blind, math driven occupation. While a reasonable theory, as much as theories can be, though some see it as gimmicky, math alone cannot reflect the value of a stock.
For example, the Dogs of the Dow strategy has no way of knowing that there is a pandemic raging across the world and that it might be worthwhile to overweight on consumer staples and technology at such a time.
Besides, a year, the period this strategy requires an investor to hold stocks, is a long time in investments. Businesses will not align their performance with the Dog’s neat annual cycles. Events will happen when they happen, and prices will get impacted as and when.
Of course, there are no guarantees in any strategy. As in life, so in stock picks. A theory cannot be a replacement of the traditional analysis-based stock-pick approach that works on the fundamentals and factors in variables that a model cannot.
