"Dogs of the Dow" Investment Method

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After taking five vacations this summer, I come back to a crazy work month as we have a major sporting event in my city. Roads are blocked everywhere – getting to and from work have been a challenge, and more traffic to come. I’m getting “forced” overtime pay as I have to leave for work 2 hours ahead instead of 30 minutes because I don’t know what kind of traffic I would run into.

Soccer season has begin again. I have been a busy bee trying to switch my schedule around at work to free the afternoon off. It is the U12 team, but since they didn’t have enough U10 kids, they have move some of the U10 kids to my team. At the first practice, I made them do sprint, we did 2 sprinting laps. Running is boring, so to make it interesting, I normally would run with them and make a competition out of it. One of the little boy was saying “I’ve never gotten beaten by a girl before (he refers me as a “girl” ha). Anyhow, I told him, I’m not just a girl, I’m your coach of course I’d beat you on every skills include sprinting :). (I didn’t tell him I was the fastest girl at my middle school, and that, I don’t normally run, so my muscle naturally have a lot of fast twist for fight-or-flight event.)

I’ve also learnt from Wikipedia the investment method call “Dogs of The Dow”.

The Dogs of the Dow is an investment strategy popularized by Michael B. O’Higgins, in 1991 which proposes that an investor annually select for investment the ten Dow Jones Industrial Average stocks whose dividend is the highest fraction of their price.

Method: 

Blue Chip companies do not alter their dividend to reflect trading conditions and, therefore, the dividend is a measure of the average worth of the company; the stock price, in contrast, fluctuates through the business cycle.

  • This should mean that companies with a high yield, with high dividend relative to price, are near the bottom of their business cycle and are likely to see their stock price increase faster than low yield companies.
  • Under this model, an investor annually reinvesting in high-yield companies should out-perform the overall market.
  • The logic behind this is that a high dividend yield suggests both that the stock is oversold and that management believes in its company’s prospects and is willing to back that up by paying out a relatively high dividend.
  • Investors are thereby hoping to benefit from both above average stock price gains as well as a relatively high quarterly dividend.

Of course, several assumptions are made in this argument.

  1. The dividend price reflects the company size rather than the company business model.
  2. Companies have a natural, repeating cycle in which good performances are predicted by bad ones.

Results:

O’Higgins and others back-tested the strategy as far back as the 1920s and found that investing in the Dogs consistently outperformed the market as a whole. Since that time, the data shows that the Dogs of the Dow as well as the popular variant, the Small Dogs of the Dow, have performed well. For example, for the 20 years from 1992 to 2011, the Dogs of the Dow matched the average annual total return of the Dow (10.8%) and outperformed the S&P 500 (9.6%)

The Small Dogs of the Dow, which are the five lowest priced Dogs of the Dow, outperformed both the Dow and S&P 500 with an average annual total return of 12.6%.

  1.  When each individual year is reviewed it is clear that both the Dogs of the Dow and Small Dogs of the Dow did not outperform each and every year.
  2. In fact, the Dogs of the Dow and Small Dogs of the Dow struggled to keep up with the Dow during latter stages of the dot-com boom (1998 and 1999) as well as during the financial crisis (2007-2009). 
  3. This suggests that an investor would be best served by viewing this as a longer-term strategy by giving this portfolio of stocks time to recover in case of a rare but extreme economic event (e.g., dot-com boom, financial crisis).
  4. While most any investor can back test an investment system that performed well over the recent past (data mining), what is unique about the Dogs of the Dow in this regard is that it has been forward tested for over two decades which included multiple booms and busts.

How to Apply this method? What are the dogs of the dow stocks today?

Symbol Company Price Yield Price Yield Day % Chg
NYSE / NASDAQ The 2015 Dogs of the Dow are listed in blue on 9/17/15 on 9/17/15 on 9/18/15 on 9/18/15 See Note 1
T AT&T 32.78 5.74% 32.55 5.78% -0.70%
CVX Chevron 79.41 5.39% 77.74 5.51% -2.10%
VZ Verizon 45.23 5.00% 44.57 5.07% -1.50%
CAT Caterpillar 74.06 4.16% 71.86 4.29% -3.00%
XOM ExxonMobil 74.46 3.92% 72.68 4.02% -2.40%
PG Procter & Gamble 70.24 3.77% 69.94 3.79% -0.40%
GE General Electric 25.35 3.63% 24.8 3.71% -2.20%
IBM International Business Machines 148.14 3.51% 144.51 3.60% -2.50%
MCD McDonald’s 97.84 3.48% 97.05 3.50% -0.80%
KO Coca-Cola 39.38 3.35% 38.98 3.39% -1.00%
PFE Pfizer 33.48 3.35% 32.85 3.41% -1.90%
MRK Merck 53.96 3.34% 52.13 3.45% -3.40%
CSCO Cisco Systems 25.88 3.25% 25.54 3.29% -1.30%
INTC Intel 29.71 3.23% 29.02 3.31% -2.30%
JNJ Johnson & Johnson 94.84 3.16% 93.39 3.21% -1.50%
DD DuPont 48.08 3.16% 47.53 3.20% -1.10%
WMT Wal-Mart 64.47 3.04% 63.34 3.09% -1.80%
MMM 3M 142.95 2.87% 139.62 2.94% -2.30%
JPM JP Morgan Chase 62.65 2.81% 60.94 2.89% -2.70%
MSFT Microsoft 44.25 2.80% 43.48 2.85% -1.70%
UTX United Technologies 93.31 2.74% 91.07 2.81% -2.40%
BA Boeing 137.45 2.65% 136.09 2.67% -1.00%
TRV The Travelers Companies 101.66 2.40% 99.66 2.45% -2.00%
HD Home Depot 117.91 2.00% 115.12 2.05% -2.40%
UNH Unitedhealth Group 123.26 1.62% 122.47 1.63% -0.60%
AXP American Express 77.06 1.51% 75.95 1.53% -1.40%
GS Goldman Sachs 186.45 1.39% 180.94 1.44% -3.00%
DIS Disney 104.2 1.27% 102.84 1.28% -1.30%
NKE Nike 115.27 0.97% 115.05 0.97% -0.20%
V Visa 70.96 0.17% 69.79 0.17% -1.60%
Index Description Price Avg Yield Price Avg Yield Day % Chg
on 9/17/15 on 9/17/15 on 9/18/15 on 9/18/15 See Note 1
AAPL Apple 113.92 1.83% 113.45 1.83% -0.40%
Index Description Price Avg Yield Price Avg Yield Day % Chg
on 9/17/15 on 9/17/15 on 9/18/15 on 9/18/15 See Note 1
Dogs of the Dow 10 highest yielding Dow stocks on 12/31/14 4.13% 4.21% -1.90%
Small Dogs of the Dow 5 lowest priced Dogs on 12/31/14 4.21% 4.27% -1.40%
Dow 30 30 Dow stocks on 12/31/14 2.99% 3.04% -1.80%
DJIA Dow Jones Industrial Index 16,674.74 2.99% 16,384.79 2.91% -1.70%
  1. I didn’t know about this method but I have bought some of the stocks in the past, so I was just continue to average down such as WMT, CAT, PG, images
  2. T is no longer a member of the DOW, but I might consider buying more if it go down some more
  3. Millennials who has just started to invest in 2008, haven’t seen the increase rate environment and hasn’t seen the bear market yet. So, it will be very interesting how millennials on Wall Street will react.
  4. The question is dividend stocks the answer? It could be if we are entering the bear market.

Please let me know what you think about this investment strategy. Have you tried it before? Are you doing your own version of the “dog of the DOW”. Let me know what are you thoughts.

GA

9 Comments

  1. Its an interesting method, Vivianne. I learned about it a while ago and I think it about a year ago, I was looking at the list and did a lot more digging and ended up picking AT&T based on the great books they have. I havent added to T since, and now that its in the low 30s, I am tempted to add more.

    Best wishes
    R2R

    • You are so advanced! I took many business courses in college, but no where they mentioned this investment method. There are so many interesting to learn, school doesn’t stop when we finish college for sure. Thanks for stopping by.

      T is paying dividend consistently, so I’m the bear market where the price doesn’t advance, Dividend payout from T will boost up the portfolio for sure.

      • You are too kind 🙂
        T is a great income play – high dividend – and growing beating out with just a lil bit over the inflation rate. Their expansion into Mexico and DirecTV purchase will do well in the comign years…I think their forward EPS for next year is seeing a nice jump from previous years

        Best
        R2R

  2. Vivianne, thanks for your article. With the Dogs of the Dow, I think you sell at the end of the period – e.g. could be the end of year, and then start over. It is slightly different from the typical DGI buy and hold (very) long.

    BTW, I am also long with T.

    D4s

    • Thanks for the correction. I’m also long T. I don’t want to switch position either unless it’s for taxes purposes to collect loss, as a lot of my holding the dividends just don’t stop flowing even during several market crashes. But I thought it would be a good method to learn so see what’s out there.

  3. Hi Vivianne

    The Dogs of the Dow method has great backtrack record but I don’t think you should follow it because it’s a brainless method to pick the lowest and rebalance the portfolio. I think you can do better than that.

    Even so, I think picking an ETF would be easier than rebalancing by buying the poorest performer in the index. I think they could be poor for a reason.

    • B,
      Thanks for the insight. You are right. It was just a thought, it seems like there are many stocks to pick nowadays as every one of them is down from the all year high. Dog of the Dow would be a good place to start.

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