Dogs of The Dow Investment Strategy Explained

investment strategy

The Dogs of the Dow Investment Strategy is one of the oldest strategies used so far as the Dow Index is concerned. The idea is simply to beat the Dow Jones Industrial Average (DJIA) each year. This is done by investors allocating money to ten blue-chip stocks that have the highest-yielding dividends. The strategy was popularized in 1991 through Michael B. O’Higgins’ book called ‘Beating the Dow.’ Within the book, this particular strategy was christened ‘Dogs of the Dow.’

To begin understanding the strategy, a few related terms must first be explained. We begin by looking at what exactly the Dow Jones Industrial Average (DJIA) is.

 

What is the Dow Jones Industrial Average (DJIA)?

The DJIA is at the center of the Dow Jones Industrial Average (DJIA). It is also known as the Dow 30. This is an industrial average that tracks 30 big blue-chip companies that are publicly owned and traded on the New York Stock Exchange (NYSE). They are also traded on the National Association of Securities Dealers Automated Quotations (NASDAQ).

Here, blue-chip companies refer to large companies that have consistently stayed put through various downturns in the economy. These include companies that have paid consistent dividends for more than twenty years consecutively. In general, investors who prefer a low-risk profile and are conservative prefer investing in blue-chip stocks. 

The DJIA is now taken to indicate the status of the American economy as a whole. When people say that the American market is doing well, they are usually referring to the Dow. Some of the companies in the Dow 30 include the Microsoft Corporation and the Walt Disney Company.

You should also note that the DJIA is not a static index, and changes are made to it according to the health of each company. As a company loses market capitalization, changes are made to its position in the index.

This average was initially calculated using only 12 blue-stock public companies. Following several mergers and changes, simple arithmetic mean is no more used to calculate the Dow. The DJIA instead accommodates 30 blue-stock companies currently.

The Dog of the Dow investment strategy is a long-term strategy that looks to beat the Dow. This is done by choosing ten of the highest dividend-yielding stocks of the DJIA in a given year. This means that those companies that are at the bottom of the business cycle are picked. 

Now that you know how the DJIA is related to the strategy, we can better understand the Dogs of the Dow investment strategy.

 

What is the Dogs of the Dow Investment Strategy?

The basic idea behind the Dogs of the Dow investment strategy is that the companies’ dividends are a great indicator of their financial health. While the stocks of companies depend on earnings, dividends, and the rules attached to them stay constant. A dividend is a payment that a company makes to its shareholders every quarter. These payments are generally made from the company’s profits.

Hence, this is seen as a great way to assess a company’s actual financial health. In general, investors allocate their money into the stocks of ten companies, which yield the highest dividends. These investments are held for a year. Following this, they are liquidated, and this money is allocated to the dogs of the coming year.

This simply means that companies that pay high dividends often do not do very well in the market. This is because their resources go out as dividends and not as investments into company growth. Despite this, the Dogs of the Dow strategy is known to do extremely well. It is especially recommended for low-risk investors. The Dogs of the Dow will give you high dividends on your investment.

Further, the ten dogs or underdogs that are invested in are undervalued among the Dow30. Hence, they have the greatest potential for growth and catching up with the DJIA. Hence, they can be a potentially rewarding investment.

 

How Can You Choose the Dogs of the Dow?

The Dogs of the Dow have to be chosen each calendar year afresh. This can be done by looking at the closing price for the last trading day in the last year. Once this is done, you will have to pick ten of the companies that pay the highest dividends. From your portfolio, allocate 10% to each chosen company.

Do note that the chosen number of stocks invested in will be different for each company. This means that 10% of your allocated amount will let you invest in a different number of stocks for each 10%. This is because the pricing of each company will be different. Now, you can begin reaping the benefits and wait to reallocate in the next year.

In the coming year, the dogs may not remain the same. Some will be replaced, and you will have to reallocate accordingly. This process may sound complex, but you don’t have to worry too much. Many mutual funds packages are now designed to follow the Dog of the Dow strategy. You can simply pick one of these and allocate your resources accordingly.

Do note that the Dogs of the Dow is simply a strategy. There have been several times when the Dow or the DJIA has performed much better than the Dogs of the Dow and vice-versa. 

 

Who Are the Dogs of the Dow?

So far, we have explained the Dogs of the Dow investment strategy and how you can pick the dogs for the year. In this section, we have outlined a few companies that have served as the dogs in both 2019 and 2020. As we discussed above, these companies are chosen based on their closing performance in the previous year.

For instance, based on the closing performance of these companies in the year 2019, they emerged as dogs in 2020. These companies include ExxonMobil, Verizon, Cisco, and Coca-Cola, among others. 

Similarly, based on the closing performance of the Dow30 in 2018, the following emerged as dogs in 2019. These include International Business Machines, Chevron, Pfizer, and Merck, among others.

 

How Can the Investor Benefit?

If you are convinced that the Dogs of the Dow investment strategy is for you, you may want to know exactly how you will benefit. This strategy will give you stable dividends.

Once you invest 10% of your money in each of the ten dogs, you will be reaping from a market performance that will be very similar to that of the Dows. In addition to this, you will also be earning high dividends. Together, these make for great earnings.

However, you should also know that the strategy requires you to adhere to time conventions. You must liquidate your previous stocks on the last day of the calendar year. You must also invest in the ten dog companies on the first day of the calendar year.

It is only after this that you can sit and reap the benefits of your timely investments. You should also note that even if you are investing in the dogs of the lot, you are still dealing with a low-risk investment. This is because all the companies on the Dow 30 are blue-chip, stable entities.  

 

What to Keep in Mind When Investing in the Dogs of the Dow 30?

As with most investments, it is best to make an informed decision when you invest in the Dow 30 using the Dog of the Dow investment strategy. You may first want to ask yourself if Dogs of the Dow fits your financial portfolio. In this case, it may be a good idea to get professional advice from a financial advisor. They will be able to evaluate your portfolio and guide you through the investment. 

You may also want to consider factors like inflation and capital gains and how they may affect your investment over the year. Again, a financial advisor can take a look at your assets and weigh them against your strategy for better results.

That being said, the Dogs of the Dow strategy has performed very well a few years. This was especially seen in 2018 when it performed better than the Dow. If you are investing on your own and not seeking an advisor’s help, you may want to keep an eye on the several calculators and forecasts that can guide you through.

You can also take a look at the Dogs of the Dow website that can guide you through the right strategy for you.

 

Summing It Up

The Dogs of the Dow investment strategy is a great option for low-risk investors who want to get the best out of the Dow 30. The simple idea is to beat the DJIA. This is done by investing in the stocks of those ten blue-stock companies that pay the highest dividend. These companies are usually underperformers in the market and tend to have good growth rates over the year, benefiting investors. 

If you are looking to invest in companies that have stable growth records, this may be the strategy for you. In general, look for companies that have consistently paid dividends for over 20 years. Investing in these will keep you earning consistently and investing big.