Investors often turn to the “Dogs of the Dow” strategy, which focuses on investing in the highest-yielding yet underperforming stocks in the Dow Jones Industrial Average. But why do investors choose to invest in underperforming stocks, and what is the rationale behind this approach?
Let’s explore how the Dogs of the Dow strategy works, which stocks it includes, and how it compares to other similar strategies.
Understanding the Dogs of the Dow Strategy
The Dogs of the Dow strategy involves investors purchasing shares of the 10 highest-yielding Dow dividend stocks at the beginning of each year.
At the end of December, investors identify the top 10 stocks based on dividend yield, calculated by dividing the annual dividend per share by the price per share. This list is typically available on various websites at the start of the year. On the first trading day in January, investors evenly distribute an amount into each of the 10 stocks and hold them for one year, aiming to mirror the performance of the Dow Jones Industrial Average.
There are some underlying assumptions in this strategy. Firstly, it assumes that blue-chip companies maintain a stable dividend payout regardless of market conditions. Secondly, while dividends are expected to remain stable, stock prices can still fluctuate.
The premise is that a high dividend yield indicates an undervalued stock, potentially leading to faster share price appreciation in the future. Value investors find these stocks appealing as they offer both income and potential capital appreciation over time.
The Dogs of the Dow Stocks
At the end of the year, investors following this strategy rebalance their portfolios to align with the current top 10 highest-yielding Dow dividend stocks. The list for 2024 includes:
| Company | Ticker | Yield |
|---|---|---|
| Walgreens Boots Alliance | WBA | 11.14% |
| Verizon Communications | VZ | 6.17% |
| 3M | MMM | 5.29% |
| Dow Inc | DOW | 4.50% |
| IBM | IBM | 3.12% |
| Chevron | CVX | 3.11% |
| Amgen | AMGN | 3.01% |
| Coca-Cola | KO | 2.75% |
| Cisco Systems | CSCO | 2.68% |
| Johnson & Johnson | JNJ | 2.63% |
Source: DogsoftheDow.com as of Sept. 20, 2024.
For a deeper insight into the strategy and its performance, investors can analyze analysts’ opinions, historical performance, and charts. The Dogs of the Dow approach aims to be simple and low maintenance.
While the strategy has shown notable returns, its performance can vary based on market conditions. Since 2000, it has had an average annual total return of 8.7%, closely aligning with the Dow Jones Industrial Average’s performance.
Investing in High-Dividend-Yield ETFs
Investing in exchange-traded funds (ETFs) that target high-dividend-yield stocks similar to the Dogs of the Dow strategy can be an alternative approach. While there isn’t an ETF specifically following the Dogs of the Dow strategy, the Invesco Dow Jones Industrial Average Dividend ETF (DJD) comes close. This ETF weights its constituents by their 12-month dividend yield, akin to the Dogs of the Dow approach.
ETFs mimicking the Dogs of the Dow strategy can enhance diversification by spreading risk across a broader range of securities with varying weightings, rather than focusing solely on the top 10 highest-yielding dividend stocks.
It’s advisable for investors to hold more than just 10 individual stocks in their portfolios. If opting for the Dogs of the Dow strategy, it should complement existing investments rather than be the sole strategy.
Conclusion
The Dogs of the Dow strategy aims to capitalize on the highest-yielding yet underperforming stocks in the Dow Jones Industrial Average for potential share-price gains. While there are ETFs with similar strategies, maintaining a diversified portfolio is essential. Incorporating the Dogs of the Dow approach alongside other investment strategies can offer a balanced investment portfolio.
Investors should conduct independent research into investment strategies before making decisions. Past performance does not guarantee future price appreciation.