The Dogs of The Dow is an investing strategy that consists of buying the 10 stocks with the highest dividend yield out of the Dow Jones Industrial Average (DJIA), an index of 30 large-cap U.S. stocks. The portfolio should be adjusted at the beginning of each year to include the 10 highest yielding stocks. It’s important to note that this is a long-term investment strategy. In the long run, the average return of the Dogs should outperform the Dow-30.
A simple dividend strategy
To implement the Dog of the Dow strategy is simple, just take the amount of money you would like to invest in this strategy and then divide this equally over the 10 highest yielding stocks in the DJIA. Hold these stocks for a year and then at the end of 12 months, look at the 30 Dow stocks again and apply again the 10 highest yielding stocks rule.
Dogs of the Dow Performance 2020
Despite the COVID-19 pandemic and the uncertainty of an election year, U.S. equities recovered from their March lows to end the year on a high note based on vaccine hopes. The Dow Jones Index (DJI) ended up +9.72% and the S&P 500 gained +18.40%.
In 2020, the Dogs of the Dow strategy underperformed both the S&P 500 and DJI. The 10 Dogs of the Dow ended 2020 with a performance of -7.96%. which is -17.68% below the DJI (DJI). The “small Dogs of the Dow” had an even more difficult year and ended down -12.14%, resulting in an underperformance of -21.86%.
The underperformance is mainly the result of the allocation to the energy sector in this strategy. Exxon (XOM) and Chevron (CVX) took a dive due to the COVID-19 impact on oil prices. See below the charts and table with the latest performance data.
Dog of the Dow 2021
Here are the Dogs of the Dow 2021 based on the 12/31/20 dividend yield:
Compared to 2020, Exxon and Pfizer will be replaced by Amgen (AMGN) and Merck & Co (MRK).
Is the Dogs Strategy still working?
Looking back over a longer period of time (2008-2020), the average annual return of the DJIA was 10.05% versus 9.56% for the Dogs of the Dow strategy. The Small Dogs of the Dow are over time slightly worse with an average annual return of 8.07%. The out-performance in percentages is -0.49% for the general Dogs strategy and -1.98% for the small dogs. Both strategies outperform 7 out of the last 13 years.
One should keep in mind with this investment strategy that the Dow stocks with the highest yields likely did not perform well in the past year are selected. (As prices go up, yields go down, and vice versa.). So, in many cases, the (2020) laggards are selected. 2020 has been an exceptional year and impacting the outperformance a lot as you can see in the table below.
Some closing thoughts, dividend stocks and the Dogs of the Dow strategy are an interesting starting point for dividend investors. However, this popular investment strategy that prioritizes high dividend yields is struggling to keep up with the Dow Jones Index and outperform the index. Since 2008 the average outperformance is even negative. Being optimistic for 2021, the upward potential is still looking okayish. Based on the 1-year target price set by Wall-street analysts and the forward dividend yield the average (potential) total return could be around 11.5%. This looks promising and is also above the average return of the Dow-30.