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
This year all the dogs had a difficult year and non of the 10 stocks were able to outperform the Dow-30 (DJI) with respect to total return year-to-date (12/22/20). The picture below says it all, the dow-30 total return of 8.64% (ytd) is unmatched by any of the 10 “dogs stocks”.
The Dogs have performed a -7.72%, year to date, with dividends included. That lags well behind the 8.64% total return of the Dow Jones Industrial Average and means an unmatched underperformance of -16.36%. Since 2008, the dogs underperformed 5 times, 2008 being the worst with -6.8%. The “small dogs” performed a bit better with -3.54% (ytd).
From 1957 to 2003, the Dogs of the Dow strategy outperformed the Dow Jones index by about 3%. Between 1973 and 1996 the outperformance was even more impressive, about 4.5%. However nowadays the outperformance is dropping towards 1.2%-2% levels.
See for the latest performance our dogs of the dow tracker
At the start of the year, the 2020 Dogs were Dow Inc. (DOW), Exxon Mobil (XOM), IBM (IBM), Chevron (CVX), Pfizer (PFE), 3M (MMM), Walgreens Boots Alliance (WBA), Cisco Systems (CSCO), Coca-Cola (KO), and Verizon Communications (VZ).
Especially the energy stocks Exxon Mobil and Chevron impacted the negative performance of the Dogs of the Dow, due to COVID-19 and the drop in oil prices. Worth noting is also the fact that Exxon and Pfizer were removed from the Dow Jones Industrial Average index during 2020.
Dogs of the Dow for 2021
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.
Compared to 2020, Exxon and Pfizer will be replaced by Amgen (AMGN) and Merck & Co (MRK) based on the current data. Amgen and JPMorgan are close with respect to their dividend yield and could swap places.
The year 2020 has been exceptional in many ways and far from a normal year for investors. Looking ahead to 2021, the dogs could return to normal. 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 12%. (See the table above) This looks promising and is also above the average return of the Dow-30.