What are Dogs of the Dow?
Dogs of the Dow is an investment strategy in which an investor aims to select a total of ten Dow stocks (known as Dogs) which have the highest dividends yields. The purpose of the strategy is to generate the highest yields for the investors by choosing those stocks that provide high dividend yields.
History
The strategy was brought into existence by Michael B. O’Higgins in 1991, and the same was published in a book written by him named “Beating the Dow.” The same was also uploaded 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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Source: Dogs of the Dow (wallstreetmojo.com)
How Does it Work?
- This strategy is based on the argument that those companies of the Dow Index, which issue blue-chip stocksBlue-chip StocksBlue-chip stocks refer to the stock of large stable companies having market capitalization in billions that provide a good return on stocks, may provide dividends, have less risk and are considered to be safe investments. Examples of such stocks include Coca-Cola ltd, IBM Corp, Boeing Co., PepsiCo, General Electric (GE), Intel, Visa, Wal-Mart, IBM Corp, Apple, Walt Disney, Mc Donald’s, Goldman Sachs, Johnson & Johnson, etc.read more, are better able to survive in the difficult economic and market conditions and maintain their dividend payouts in such conditions.
- 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, for such stocks, the prices are expected to increase faster than those with low dividend yields in the inadvertent business conditions. It is why the dogs are able to perform better than the overall market when the results of the entire year are combined.
- In the strategy, an investor selects the top 10 stocks of the Dow Index in terms of dividend yield, as at the end of the year-end.
- On the very first of the day of the next year, the investor invests in those stocks. The investments are held for a whole year, and the same process is repeated each year to rebalance the positions that are to be 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. Now, since 10 topmost stocks with the highest dividend yield are chosen, the amount that the investor would need to invest in each such 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, have a look at the list of stocks that form part of this in the year 2020.
- Dow
- ExxonMobil
- IBM
- Verizon
- Chevron
- Pfizer
- 3M
- Walgreens
- Cisco
- Coca-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 that of the Dow index.
- The strategy doesn’t 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 investment strategy offers the following advantages to its followers.
- The strategy is straightforward to apply, as there is no complexity in its application.
- The topmost performing stocks are considered in the strategy, with respect to dividend yield, and they help an investor earn higher returns.
- The strategy doesn’t involve any assumptions, and 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 way too simple and does not take into account critical and complex factors.
Conclusion
The strategy is straightforward in its application and doesn’t need any assumptions to be made. Thus, an investor can easily make use of this investment strategy to earn higher returns on the Dogs.
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