Dogs of the Dow

Dogs of the Dow is an investment strategy that uses the 10-highest dividend–yielding blue-chip stocks in the Dow Jones Industrial Average (DJIA) 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 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.”

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 the 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.

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 nonprofessionals, 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.