It can be important to have a strategy for your money, and Dogs of the Dow is an income and dividend-focused concept which is simple to understand for all investors. Using this strategy requires little in the way of thought or action, as the stocks you need to purchase are simply outlined.
So, is the Dogs of the Dow for you?
What is Dogs of the Dow?
This strategy involves selecting a portfolio of stocks from the Dow Jones Industrial Average (DJIA) based on specific criteria, which are pretty simple to follow:
Start by looking at the 30 stocks that make up the DJIA.
Identify the 10 stocks with the highest dividend yield. This is calculated by dividing the annual dividend per share by stock price.Allocate an equal amount of investment capital to each of the 10 selected stocks.
Hold the portfolio for one year, regardless of any changes in the stock's price or dividend yield.
After one year, review the portfolio and repeat the process by identifying the 10 stocks with the highest dividend yield. Adjust the portfolio accordingly.
The underlying idea is that when a stock's dividend yield is high, it may indicate that the stock is temporarily undervalued. This is because the blue-chip stocks from the DJIA are largely resilient and long-running giants with significant clout and will often leave their annual dividend unchanged in hard times because they can afford to take a bit of a hit.
By investing in these stocks, an investor can potentially benefit from higher dividend income and capital appreciation as the market corrects the undervaluation.
The strategy assumes that high-quality companies within the DJIA will eventually see their stock prices rise, leading to a decrease in dividend yield. By rotating the portfolio annually and selecting stocks with the highest dividend yield, investors aim to capture potential gains from the reversion to the mean.
It's important to note that the Dogs of the Dow strategy is a long-term approach and may not always outperform the overall market. As with any investment strategy, thorough research and analysis should be conducted before making investment decisions.
Does Dogs of the Dow Work?
Now that we know the method behind the strategy, it’s important to consider whether it has a good track record or not.
First, it’s important to note that Dogs of the Dow doesn’t always beat the DOW 30 index, losing out on multiple occasions on an annual basis. For example, a particularly disastrous performance in 2020 saw the dogs secure a loss of 12.6% while the overall index recorded gains of 7.2%.
However, since 2000, the strategy is ahead of the DJIA with an average annual total return of 8.7%. It also outperformed the DJIA in the decade following the 2008 financial crisis.
However, according to a study from the International Journal of Economics and Finance the approach didn’t produce a substantial improvement in returns between 2000 and 2017.
With its inconsistent annual record and need to make adjustments every 12 months, Dogs of the Dow is a strategy for long-term investors who are happy to keep in touch with buying and selling stocks on a semi-regular basis. It also appears to be well-suited for investors who want to enjoy growth without having to do too much research.
The Current Dogs of the Dow
If you want to try out the strategy yourself, the blue-chip stocks with the highest dividend yields from 2022 were:
Verizon (NYSE: VZ)
Dow Inc (NYSE: DOW)
Intel Corporation (NASDAQ: INTC)
Walgreens (NASDAQ: WBA)
3M (NYSE: MMM)
IBM (NYSE: IBM)
Amgen (NASDAQ: AMGN)
Cisco (NASDAQ: CSCO)
Chevron (NYSE: CVX)
JPMorgan Chase (NYSE: JPM)
However, if you want to start now then maybe you should pick from the current table, as this is the current ten highest dividend yielding members of the DJIA:
Verizon (NYSE: VZ)
Dow (NYSE: DOW)
Intel (NASDAQ: INTC)
Walgreens (NASDAQ: WBA)
3M (NYSE: MMM)
IBM (NYSE: IBM)
Cisco (NASDAQ: CSCO)
Chevron (NYSE: CVX)
JPMorgan (NYSE: JPM)
Amgen (NASDAQ: AMGN)
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