What are Dogs of the Dow?

History

The strategy was brought into existence by Michael B. O’Higgins in 1991, and he published the same in a book named “Beating the Dow.” He also uploaded the same later on over the official website of Dogs of the Dow. The strategy suggested that if ten such stocks are chosen that provide the highest dividend yieldsDividend YieldsDividend yield ratio is the ratio of a company’s current dividend to its current share price.  It represents the potential return on investment for a given stock.read more, the overall performance will beat even the Dow index.

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How Does it Work?

  • This strategy is based on the argument that those companies of the Dow index, which issue blue-chip stocks Blue-chip StocksBlue chip stocks are issued by companies possessing large market capitalization. Blue chip companies are market leaders. They provide good returns on stocks, offer dividends, and are considered safe investments.read more, are better able to survive in difficult economic and market conditions and maintain their dividend payouts.As a result, they tend to outperform the entire stock market. Accordingly, such stocks are said to be better indicators of the investments’ worth. The stock prices do fluctuate based on the market and business conditions.However, the prices are expected to increase faster for such stocks than those with low dividend yields in inadvertent business conditions. The dogs can perform better than the overall market when the year’s results are combined.In the strategy, an investor selects the top 10 stocks of the Dow index in terms of dividend yield at the end of the year-end.The investor invests in those stocks on the first day of the next year. The investments are held for a whole year, and the same process is repeated each year to rebalance the positions taken to maintain the holding in fresh stocks that meet the criterion.

Examples

Let us consider an example wherein an investor wants to make a total investment of $20,000 in the stocks, using the Dogs of the Dow strategy. Since the ten top stocks with the highest dividend yield are chosen, the investor’s amount to invest in each stock comes to be $2,000 (i.e., 20,000/10). It is known as equal price weightage as a similar investment is made in each stock irrespective of their prices.

Current Dogs of the Dow

Now, look at the list of stocks that form part of this in 2020.

  • DowExxonMobilIBMVerizonChevronPfizer3MWalgreensCiscoCoca-Cola

Criticism

Some analysts are criticizing the strategy due to the following facts: –

  • It uses equal weightage for all stocks, and instead, price weighting shall be used in its place, and when price weighting is applied, the dogs give less return than the Dow index.The strategy does not account for many important factors such as dividend-payout ratioDividend-payout RatioThe dividend payout ratio is the ratio between the total amount of dividends paid (preferred and normal dividend) to the company’s net income. Formula = Dividends/Net Incomeread more, price performance, etc.

Advantages

The [wsm-tooltip header=“Investment Strategy” description=“Investment strategies assist investors in determining where and how to invest based on their expected return, risk appetite, corpus amount, holding period, retirement age, the industry of choice, and so on.” url=“https://www.wallstreetmojo.com/investment-strategies/"]investment strategyThe Investment StrategyInvestment strategies assist investors in determining where and how to invest based on their expected return, risk appetite, corpus amount, holding period, retirement age, industry of choice, and so on.read more[/wsm-tooltip] offers the following advantages to its followers: –

  • The strategy is straightforward, as there is no complexity in its application.The top-performing stocks are considered in the strategy regarding dividend yield, and they help an investor earn higher returns.The strategy does not involve any assumptions. Thus, it is based on actual and reliable data.

Drawbacks

The strategy suffers from the following limitations: –

  • Equal price weighing is used, which gives equal weightage to all the stocks instead of giving weightage to the prices of the stocks while making investments.Also, as mentioned earlier, the strategy is too simple and does not consider critical and complex factors.

Conclusion

The strategy is straightforward in its application and does not need any assumptions. Thus, an investor can easily use this investment strategy to earn higher returns on the Dogs.

This article is a guide to Dogs of the Dow. We discuss the definition, Dogs of the Dow strategy, examples, and how it works with advantages and drawbacks. You may learn more about financing from the following articles: –

  • Capital Allocation LineEquity InvestorCyclical StocksNASDAQ vs. Dow JonesStock Market Bubble