Definition
“Dogs of the Dow” is an investment strategy based on the 10-highest dividend-yielding stocks in the Dow Jones Industrial Average at the end of each year. The strategy suggests that an investor should buy these 10 stocks and hold them for one year, then update the portfolio annually with the new “dogs.” The logic behind this approach is that blue-chip companies with high yields are near the bottom of their business cycle and likely to see their stock prices increase.
Phonetic
The phonetic pronunciation of the keyword: Dogs of the Dow is “Dawgz ov thuh Dow”.
Key Takeaways
- The Dogs of the Dow is an investment strategy that advocates buying the 10 highest dividend-yielding stocks in the Dow Jones Industrial Average (DJIA) at the beginning of each year. The strategy is based on the belief that blue-chip companies offer reliable returns and are likely to increase their dividends over time.
- Investing in the Dogs of the Dow provides a built-in diversification, as the companies are spread across different sectors of the economy. This makes it less likely that a decline in one sector will significantly impact your whole portfolio.
- Although the strategy is simple and has provided solid returns over the years, it also has its risks. It assumes that companies paying high dividends today will continue to do so in the future, which is not always the case. Also, the strategy does not take into account other important factors such as the company’s overall financial health or market conditions.
Importance
The “Dogs of the Dow” is a popular investment strategy used to decide which Dow Jones Industrial Average stocks to buy and sell, and when to do so. Its importance lies in its simplification of the investment process, primarily for new or more risk averse investors. The strategy involves selecting the 10 highest dividend-yielding stocks listed on the Dow at the end of each year. The belief behind this is that these ‘dogs’ or underperforming stocks are likely to appreciate in value and potentially provide generous dividends because they are bought at relatively low prices. As a result, this strategy balances the potential for continued income through dividends with an increased likelihood for capital appreciation, which could potentially offer a total return higher than the overall market.
Explanation
The ‘Dogs of the Dow’ is an investment strategy that is used for selecting the ten highest dividend-yielding stocks in the Dow Jones Industrial Average (DJIA) at the beginning of each year. The purpose of this strategy is to help investors increase their chances of earning a substantial return on their investments over time. The key idea behind this approach is that the DJIA is composed of stable and established companies, and companies with the highest yields are likely to be undervalued and therefore, have the potential for a price increase during the year, in addition to offering attractive dividend yields. The usefulness of the ‘Dogs of the Dow’ strategy lies in its simplicity, and its focus on income and value in tandem. By focusing on dividends, this strategy allows investors to generate passive income while they wait for the stock to appreciate in value. Since the strategy involves investing in blue-chip companies, it also provides a level of security to investors due to the inherent stability of these companies. However, like all investment strategies, the ‘Dogs of the Dow’ approach has its risks and it may not always be the optimal strategy depending on the stock market conditions.
Examples
“Dogs of the Dow” is an investment strategy based on the 10 highest dividend-yielding stocks in the Dow Jones Industrial Average (DJIA). Here are three real world examples of this strategy: 1. Example from 2020: By the end of the year, the top dividend yielding stocks in the DJIA were IBM, Chevron and Walgreens Boots Alliance. If an investor was following the Dogs of the Dow strategy, they would have made an investment in these companies at the beginning of 2020 due to their high dividend yield at the time. 2. Example from 2008/2009* During the financial crisis, a lot of companies’ share prices were hit hard, resulting in high dividend yields. By the end of 2008, the top-yielding stocks were Pfizer, Merck and Verizon. Following the Dogs of the Dow strategy, investors would have invested in these companies in 2009 and enjoyed substantial returns as the market recovered. 3. Example from the tech sector in 2001/2002: Post the dot-com crisis, certain tech companies like IBM and Intel became Dogs of the Dow due to their significantly depressed share prices, thus showing high dividend yields. Investors following this strategy would have made investments in these companies, reaping gains in subsequent years when these stocks recovered.
Frequently Asked Questions(FAQ)
What does ‘Dogs of the Dow’ refer to?
How does the ‘Dogs of the Dow’ investment strategy work?
Why is it called ‘Dogs of the Dow’?
Is the ‘Dogs of the Dow’ a guaranteed successful strategy?
Can I use the ‘Dogs of the Dow’ strategy with other indexes?
What are some positives and negatives of the ‘Dogs of the Dow’ strategy?
Is the ‘Dogs of the Dow’ strategy suitable for all types of investors?
How often should I review or adjust my portfolio if I follow this strategy?
Does the ‘Dogs of the Dow’ strategy take into account company fundamentals?
What are the transaction costs of this strategy?
Related Finance Terms
- Blue-Chip Stocks
- Dividend Yields
- Dow Jones Industrial Average (DJIA)
- Value investing
- Stock Market Indicators
Sources for More Information
