What is 'Dogs of the Dow'

Dogs of the Dow (the Dogs) is an investment strategy that uses the 10-highest dividend–yielding blue-chip stocks in the Dow Jones Industrial Average (DJIA) (the Dow) each year. Because the Dow is one of the oldest and most widely followed indexes in the world — and generally is seen as a barometer for the broader market — it is not uncommon for market strategists to base investing techniques on some components of the DJIA. The main reason to follow the Dogs is that it presents a straightforward formula designed to perform roughly in line with the Dow.

Though not an entirely new concept, in 1991, this strategy burst upon the investment scene, and quickly became a popular fixture, with the publication of Michael O’Higgins’ book, “Beating the Dow,” in which he also coined the name “Dogs of the Dow.”

Breaking Down 'Dogs of the Dow'

Dogs of the Dow relies on the premise that 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. In contrast, the stock price does fluctuate throughout the business cycle. This should mean that companies with a high dividend relative to stock price are near the bottom of their business cycle, so their stock price likely would increase faster than companies with low dividend yields. In this scenario, an investor reinvesting in high-dividend-yielding companies annually should outperform the overall market.

Dividend stocks offer current income and growth potential, so no wonder many investors are attracted to them. All 30 companies that comprise the DJIA pay dividends, and are among most important blue-chip businesses in the global economy. There are many ways to purchase these securities. You can hand-pick individual stocks, and build your own portfolio; invest directly in the Dow through exchange-traded funds (ETFs); or, instead of investing in the entire Dow, you can follow the Dogs of the Dow strategy, whose stocks offer better yields than the Dow as a whole. Often, in fact, the Dogs have been able to outperform the Dow over the course of the year.

How Does Dogs of the Dow Work?

The idea is to make stock picking somewhat easy and relatively safe, the latter because the universe is limited to blue-chip stocks. As a tactic, Dogs of the Dow goes like this: After the stock market closes on the last day of the year, select the 10-highest dividend-yielding stocks in the DJIA. Then, on the first trading day of the new year, invest an equal dollar amount in each of them. Hold the portfolio for a year, then repeat the process at the beginning of each subsequent year. Simple, right?

For most non-professionals, though, investing is never that simple, especially with the myriad strategies out there. So, it behooves the average individual investor to understand what she is doing with her money. Hence, Dogs of the Dow tools abound. Just browse the internet to see Dogs of the Dow opinions, commentary, analyses, calculators, charts, forecasts, stock screeners, even a Dogs of the Dow website.

Keep in mind, however, that this is a long-term strategy. There have been years when the Dow has outperformed the Dogs; but you should never expect the Dogs to outperform the Dow! It is the averages over time that investors rely on for positive results. Some years will be winners and others losers, but if you want a conservative dividend strategy that emphasizes blue-chip stocks, it is Dogs of the Dow.

For a deeper dive on the Dogs, please see our article Stock-Picking Strategies: Dogs of the Dow.

RELATED TERMS
  1. Cats And Dogs

    'Cats and dogs' is a slang term referring to speculative stocks ...
  2. Market Average

    A market average is a measure of the overall price level of a ...
  3. Dow Jones 65 Composite Average

    The Dow Jones 65 Composite Average is an index comprised of 65 ...
  4. Dow Theory

    The Dow theory states that the market is trending upward if one ...
  5. Total Revenue Test

    A total revenue test approximates price elasticity of demand ...
  6. Rule Of 18

    Rule of 18 allegedly foretells if stocks will rise or fall based ...
Related Articles
  1. Investing

    Dogs of the Dow for 2017

    With all eyes focused on the Dow's recent rally, there is one investment strategy that couldn't care less.
  2. Investing

    Understanding and Playing the Dow Jones Industrial Average

    In this article, learn strategies for investing in this price-weighted index (Dow Jones Industrial Average) and how to interpret its movements.
  3. Investing

    Burger King's New Hot Dogs:Vertical Integration Genius

    Burger King is moving beyond burgers into hot dogs. Here is why this is a smart move.
  4. Personal Finance

    Financial Advice for the Year of the Dog

    According to the Chinese zodiac, 2018 is the year of the dog. If this is your year, make the most of it in your finances.
  5. Small Business

    One-Person Businesses You Can Start Quickly

    Here is a list of professions you can quickly enter with an average-sized to large investment.
  6. Insights

    Dow Theory

    Learn about the foundation upon which technical analysis is based.
  7. Investing

    Dow Converts Preferred Stock to Common Stock (DOW)

    Dow Chemical CEO Andrew Liveris said Friday's conversion of preferred stock into common stock highlighted the strength of the company's business model.
RELATED FAQS
  1. What are these points that the Dow is always gaining or losing?

    Points on the Dow represent dollars and show whether the stocks of the 30 companies that make up the index went up or down ... Read Answer >>
  2. When did the Dow Jones Industrial Average (DJIA) begin?

    Discover how the Dow Jones Industrial Average, first published in 1896, was created as a way to inform investors of the overall ... Read Answer >>
  3. How do you compare the Dow Jones Industrial Average (DJIA) and the Toronto Stock ...

    See how the Dow Jones Industrial Average and TSX Composite move according to factors in their respective countries and from ... Read Answer >>
Trading Center