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 in 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 2020 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.
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.
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Dow Jones Industrial Average stocks
The Dow Jones Industrial Average consists of 30 blue-chip stocks. For dividend investors, this is an interesting list, since 27 of the 30 companies pay a dividend. Many stocks are able to increase their dividend for several consecutive years. The top-yielding Dow stocks all have dividends that are well above average yields in the stock market.
On August 31st, 2020 the composition of the Dow-30 has changed for the last time: Exxon Mobil (XOM), Pfizer (PFE), and Raytheon (RTX) were replaced by Salesforce (CRM), Amgen (AMGN), and Honeywell (HON).
You can download your free copy of the Dow-30 stocks list, along with relevant financial metrics like price-to-earnings ratios, dividend yields, and payout ratios, by clicking on the link below:
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The 10 Highest Yielding Dow 30 Stocks
The average dividend yield for the Dow-30 is 2.13%, which is already a good rate. Also, the average number of consecutive years of dividend increase is high with almost 22 years. Getting close to the dividend aristocrats’ status. The list of the current Dogs of the Dow based on the new index composition is below, along with the current dividend yield of the top-ten yielding DJIA stocks.
Here are some more details on the top-3 high yielding Dow Jones 30 stocks:
Dog of the Dow #3: Dow Inc
- Dividend Yield: 4.46%
Dow Inc. (DOW) is an American commodity chemical company. It was spun off of DowDuPont on April 1, 2019, at which time it became a public company and was added to the Dow Jones Industrial Average. The company is headquartered in Midland, Michigan.
The current quarterly dividend is $0.70, resulting in a dividend yield of 4.46%. DOW inc still has to build its dividend history and is a dividend aristocrat since it inherited the dividend history due to the separation of its former parent, DowDuPont. Management stated it is committed to offering an industry-leading dividend to shareholders.
Dow reported its Q1-2021 results on April 22nd. The earnings per share of $1.36 beat analysts’ estimate by $0.21. Revenue of $11.9 billion was up 26%.
Dog of the Dow #2: Internation Business Machines (IBM)
- Dividend Yield: 4.48%
International Business Machines Corp.(IBM) is an information technology company, which provides integrated solutions that leverage information technology and knowledge of business processes. It operates through the following segments: Cognitive Solutions, Global Business Services, Technology Services & Cloud Platforms, Systems, and Global Financing. The company was founded by Charles Ranlett Flint and Thomas J. Watson Sr. in 1911 and is headquartered in Armonk, NY.
In June 2020 IBM’s board approved an increase of its quarterly cash dividend for the 25th consecutive year. Although it was a small dividend increase, IBM became a Dividend Aristocrat. The company raised its quarterly dividend from $1.62/share to $1.63/share and in April 2021 IBM lifted its dividend by again a penny to $1.64 per share.
IBM reported its Q1-2021 results on April 19th. The earnings per share of $1.77 beat analysts’ estimate by $0.12. Revenue of $17.7 billion was up 1%. The Cloud & Cognitive Software grew revenue by 4%.
International Business Machines Corporation’s current dividend yield of 4.48% is -1% below its 5-year average. The 5-year average dividend yield is 4.52% (see red-line in the chart). This indicates the stock looks reasonably valued today.
Dog of the Dow #1: Chevron Corp.
- Dividend Yield: 4.99%
Dividend Aristocrat Chevron (CVX) is at the moment the highest-yielding Dow Jones Industrial Average component with a dividend yield of 4.99%, which is based on a quarterly dividend of $1.34. The company has been able to increase its dividend for 34 consecutive years.
Due to COVID-19 and as a result, the oil price drop from $60 to $20 per barrel, Chevron’s earnings-per-share was highly impacted in 2020. Chevron had an earnings-per-share loss of -$1.59 compared to a profit of $1.77 in 2019.
After three straight quarterly losses, Chevron reported a Q1-2021 profit on April 30th. The earnings per share of $0.72 missing analysts consensus by $0.04.
Chevron Corp.’s current dividend yield of 4.99% is 17% above its 5-year average. The 5-year average dividend yield is 4.25% (see red-line in the chart). This indicates the stock may be undervalued today.
Final Thoughts
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 9%. This looks promising and is also above the average return of the Dow-30.
