What Is the “Dogs of the Dow” Strategy?
If you want to invest in stocks but aren’t sure where to start, you might hear the phrase “dogs of the Dow” and be a little confused about what it means!
It’s called the “Dogs of the Dow” because it was originally developed by Michael B. O’Higgins of Investor’s Digest. He suggested a portfolio of 10 blue-chip stocks that typically outperform the Dow Jones Industrial Average on a year-over-year basis.
The technique is now a little more sophisticated, and it’s mainly used to isolate the best-performing stocks in a market. It’s quite a widely-known approach….although you’ll find that it’s all about the fine details!
So, how do you go about using the Dog of the Dow strategy? It’s really quite simple:
Add the Dow Jones Industrial Average to your portfolio.
How to Invest Using the Dogs of the Dow
The Dogs of the Dow strategy is a stock-based investment strategy that involves purchasing stocks that are in the Dow Jones Industrial Average that appear to be undervalued. In this strategy, value plays a huge role because it is designed to find low-risk, high-reward stocks to purchase. It has an extremely high historical success rate and is extremely simple.
Before you dive into this strategy, it is important to be aware that it is a no-frills approach to investing. You don’t need to try and pick the next big stock, because you are simply aiming to buy the most undervalued stocks in the Dow.
One of the consequences of this is that the stock market will almost always have winners and losers, and when you use this strategy, you will be more prone to be a loser. However, since you are using the Dogs of the Dow strategy to solely invest in the most undervalued stocks in the market, you will be able to buy and sell quickly and with low fees.
When picking the best stocks to buy, you should look at how they have performed in the previous year. What you want to look for is stocks that have underperformed the market, but also have a low beta, which is a company’s susceptibility to market trends.
Calculating the Yield Return
The Dogs of the Dow method started long ago with the objective of finding an average for the market, without the huge fluctuations of some stocks, which could be in the Dow Jones 30 constellations.
Calculating the share yield for all 30 stocks and comparing their values, allows for the following calculations:
The highest calculation yields the greatest return percentage wise.
The lowest gives the lowest yield.
The 10 stocks with biggest yield, are the favorites for the year, and the 30 stocks are the underdogs.
That method is here where we can find the average value for stocks over the last n years, and combine them to acquire the average share price for the 30 stocks.
As it is a method to determine the best yielding stocks for the long term investment, we will use the tool to determine the average for all of the stocks over the last 5 years, and compare the yields for the following years.
We will be using MS Excel for the calculation, along with the data from the stock price sections for each year for the 30 stocks with recent data (we are not using historical data which would affect the accuracy of the formula), and compare them with the returns over the following five-year periods, and filter the ranking between the highest and lowest yields.
Annual Adjustment of the Dogs of the Dow Portfolio
The original strategy was launched in 1925 and enjoyed a stunning lengthy success until the 1980 recession, but fell out of favor in 1990.
The strategy was reintroduced in 2004 by Money Magazine and since then has hit the 5-year target yearly.
The strategy begins with the Dow Jones industrial average. That can be obtained from the Wall Street Journal and is represented by five components: Caterpillar, Cisco Systems, Coca Cola, Home Depot, and McDonald’s.
The sum of the percentage changes in the closing price of those five companies represents the total increase or decrease since the beginning of the year.
The total is then divided by five, and the portfolio begins on Jul. 1st with a fixed number of dollars. The portfolio then is rebalanced every Dec. 31st.
Each company stays in the portfolio for a year and is replaced with another company from the Dow. This is determined by the percentage change from the beginning of the year. After the replacement, the portfolio is rebalanced
Ten years ago, General Motors was replaced by AT&T. More recently, on Dec. 31, 2014, Boeing replaced Kraft foods.
Dividends are quarterly payments sent by a corporation to its shareholders. The vast majority of these payments are paid in cash.
We are interested in the stocks generating above-average dividend returns. There are a number of ways to find these companies. Investors often look through tables of historical dividend returns for market sectors or industries.
We do not think this is a useful way to identify these stocks. It results in many high-yield stocks that have a hard time paying dividends. Something is always going to be cheap. However, that doesn’t always mean it’s undervalued and it certainly doesn’t mean that it will be able to pay a decent dividend.
There are other ways to identify high-dividend stocks. One way is by using trailing dividend yields.
The S&P 500 contains a number of stocks with yields higher than the typical household’s dividend yield. It is not that the companies are desperate or strapped for cash. It is just that there are a lot of high-yield stocks in the S&P 500.
But these companies are very much worth a second look. We would go so far as to say that there are two ways to look at a business.
The Theory Behind the Dogs of the Dow Strategy
The premise of the DoD strategy is that there is value in the stronger stocks of Dow 30 companies that are undervalued at the time of purchase because of the short-term market noise. “The Dow dogs strategy does not mean to buy the worst companies in the Dow30. Rather, it means to buy the cheapest stocks in the Dow.”  “To make this strategy work, you have to focus on the price/value of each stock rather than its yield.” 
The historical rationale behind the strategy is that “historically, the Dow Jones Industrial Average has outperformed the broader market by more than a three to one margin. However, roughly one-quarter of the time, the Dow has actually underperformed the broad market. It is possible that over the next 10 years, the Dow will underperform by a three to one margin, substantially eroding the gains of the previous 30 years. ” 
There is also evidence that value stocks outperform growth stocks and Dow 30 stocks outperform the S&P 500 index.
As an investor you may be drawn to the Dow 30 stock because of the following perceived characteristics:
- You know the stock
- You trust the stock
- You understand the business and its financials
What Are the Dogs of the Dow for 2022?
If you're an active trader, you may have heard of Dogs of the Dow. The Dogs of the Dow is not a list of dog breeds. They are selected stocks from the Dow Jones Index with the highest dividend yield and typically have low volatility.
"Dogs of the Dow" is a popular investment strategy that is supposed to result in high returns without a lot of risk. Instead of trying to beat the market, this strategy allows investors to achieve high returns without high risk, by investing in a strategy that eliminates volatility.
Because the strategy is taken from the Dow Jones Index, it provides diversification since the stocks are from a variety of industries and sectors. The focus is on finding good dividend stocks with a safe yield, which generally means low or no volatility.
The original strategy called for an investment in the 10 Dow stocks, with the highest dividend yields in December, over the next year. With this strategy, money invests in the stocks that have the largest and more secure returns.
However, it has been suggested  that investors would be better off doing the opposite. This is the contrarian approach, or the Dogs of the Dow for 2018, that involves buying the ten Dow stocks that have the lowest dividend yields. The point is buying low and selling high.
Pros and Cons of the Dogs of the Dow Strategy
Dow Theory is one of the most enduring investment strategies. It’s been around for nearly 100 years and is still around today. Dow Theory is based on analyzing the strength of movements on the Dow Jones Industrial Average.
The strategy is based on the idea that if the Industrial Average is in a strong trend, than that will usually play out on a majority of the stocks.
The Dom of the Dow theory has been around for a long time, and there is no doubt that it’s been around a while it has performed well.
But with the maturing markets, slowing economic growth, and changing conditions, it’s become more risky to use the Dow Theory on a short term basis.
While there is no way to know for sure, it may be time to retire the Dow Theory for a few years. You can still use it for long-term investing, but you may have to modify it to account for the changes in the markets and the economy.
As always, investment decisions should be directed by knowledgeable people who have extensive knowledge of the markets and their investments.
Pros of the Dogs of the Dow
The theory behind this is based on how the entire stock market performs, and how a small group of stocks can replace the entire market. The rule of thumb is to buy the same 10 stocks every year.
There are a number of companies that make it onto the list every year. If the years before have been kind to these companies, even if the rest of the market is down, your odds are greatly increased that these stocks will do well again.
The sheer number of companies in the Dow is an advantage of this strategy.
The Dow has a larger number of companies than some of the more popular indices like the SP 500, which often means the average company in the Dow will be a larger company just because of the sheer number of companies included.
This is not always the case, but often, the larger the company, the more consistent it will be across one year. A larger company will also often be more in demand by the investors in the market, because of its staying power, and its larger size.
On the other hand, look at a micro-cap company as an example – it is often harder to be consistent, less in demand, and in some cases, with a much lower value.
The 10 stocks in the Dow represent a balance between stability and volatility that the balance in the overall stock market does not reflect.
Cons of the Dogs of the Dow
While the Dogs of the Dow strategy can be very effective, it also has some drawbacks. As with any investment approach, there are drawbacks that can’t be avoided. In this article, we’ll take a brief look at some of the cons of the Dogs of the Dow investment strategy and how you can overcome them.
Dogs of the Dow Can Only Be Used for Long-Term Investing
Like other strategies, Dogs of the Dow can be very effective for long-term profit potential. But when we look at the statistics, the returns are approximately the same, so you could simply buy and hold an ETF or stock of your choice and not have to worry about it. You should invest in the Dogs of the Dow as a long-term investment.
There’s No Guarantee You’Ll Make Money
One of the biggest drawbacks of the Dogs of the Dow is that there’s no guarantee you’ll make money. The strategy should help you make wise investments and minimize your losses, but there’s no guarantee you’ll be successful.
They are value stocks picked at the beginning of each year as a portfolio which will earn more money than the Dow Jones Industrial Average for the following year. The stocks are chosen based on a high dividend yield.
The nine U.S. companies chosen by analysts as the safest for investment in 2022 are Alcatel-Lucent, Southwestern Energy, Philip Morris International, Procter & Gamble, Honeywell International, AbbVie, Dollar General, Mondelez, and SimpliPhi Global.
The dogs of the Dow have reached a high of 100% per annum, which makes it a very risky investment. However, no company from the list has ever gone bankrupt.
The combination of companies were selected based on buying strength, market size, sector growth, and company margins.
If the theory is true, the average growth of the companies here is:
- 80% of current value within 2-3 years
- 190% of current value within the next 3-5 years
- 300% of current value within the next 5-10 years
- 500% of current value within the next 10-15 years
Suffice to say, there is some trickery going on. A lot of it stems from the simple mathematics of the Dow Theory, and the fact that no one can really predict the future.