What Is a Dog?
In business, a dog (also known as a "pet") is one of the four categories or quadrants of the BCG Growth-Share matrix developed by Boston Consulting Group in the 1970s to manage different business units within a company. A dog is a business unit that has a small market share in a mature industry. A dog thus neither generates the strong cash flow nor requires the hefty investment that a cash cow or star unit would (two other categories in the BCG matrix). A dog measures low on both market share and growth.
For investors, "Dogs of the Dow" is an investment strategy that attempts to beat the Dow Jones Industrial Average (DJIA) each year by leaning portfolios toward high-yield investments. The general concept is to allocate money to the 10 highest dividend-yielding, blue-chip stocks among the 30 components of the DJIA.
- The term dog may also refer to a stock that is a chronic underperforming stock, and hence, a drag on the performance of a portfolio.
- There are four categories in the BCG growth-share matrix; the dog is one of them and the cash cow is another.
- In the investment world, a dog stock one year may become a cash cow another year if a company improves its profitability and profile.
- The Dogs of the Dow strategy attempts to maximize the yield of investments by buying the highest-paying dividend stocks available from the DJIA each year.
Since a dog ties up valuable capital and resources that can be more effectively deployed elsewhere in the company, it is a logical candidate for sale or divestment.
However, a dog may sometimes have a broader role to play within a company. For instance, it may offer products that complement those offered by other business units in the company, or it may be a portal that gets customers interested in the company’s other products. In such cases, management would have to decide whether the synergies and intangible gains offered by this business unit justify the capital tied up in it.
If the unit’s long-term prospects are bleak, the best course of action might be to sell or divest the business as soon as possible, since its deteriorating prospects would make it harder to sell with time. In the business world, a dog is very unlikely to ever return to its glory days as a star or cash cow.
In the majority of cases, since a dog typically operates in a mature industry, management would not be justified in allocating more capital to it in a bid to expand market share.
According to the BCG matrix, companies should liquidate, divest, or reposition these “pets.” In reality, though, such a move might not make financial sense because dogs may already have such low value and could distract management during the sale process. Frequently, their weak competitive position leaves them incapable of being “harvested” either—if the investment is reduced, they may just disappear.
Instead, consider setting them up to operate with minimal resource drain on the rest of the portfolio, as the best people and all discretionary resources are diverted to more attractive businesses. Over time, they will become a diminishing portion of the portfolio.
Dogs of the Dow
In the context of investments, a "dog" may refer to a stock that is a dog one year can eventually become a star, if management executes a turnaround that improves the stock’s profitability and prospects. This is the basic premise behind the “Dogs of the Dow” strategy, which buys the highest dividend yielders in the DJIA based on the notion that these stocks can outperform the index over time as they improve their operating performance and financial results.
Though not an entirely new concept, in 1991, this strategy first became a popular fixture with the publication of Michael B. O’Higgins’s book, Beating the Dow, in which he also coined the name “Dogs of the Dow.”