Dogs of the Dow

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?

‘Dogs of the Dow’ is an investment strategy that proposes that an investor annually select for investment the ten Dow Jones Industrial Average (DJIA) stocks whose dividend yield is the highest.

How does the ‘Dogs of the Dow’ investment strategy work?

The strategy works by buying the 10 highest dividend-yielding stocks of the DJIA at the beginning of the year and adjusting the portfolio every year thereafter. It’s a long-term investment strategy.

Why is it called ‘Dogs of the Dow’?

These stocks are referred to as dogs because they’re often out of favor in the business cycle, as their high yields often result from their low prices reflecting poor performance.

Is the ‘Dogs of the Dow’ a guaranteed successful strategy?

Like any investment strategy, there’s no guaranteed success. While it has been successful in a variety of market conditions over the long-term, each year can vary.

Can I use the ‘Dogs of the Dow’ strategy with other indexes?

Yes, variations of the strategy can be used with any index that’s made up of high-dividend stocks. It wouldn’t work as well on indexes composed of growth stocks that don’t pay high dividends.

What are some positives and negatives of the ‘Dogs of the Dow’ strategy?

The positives are its simplicity and its focus on blue-chip companies that tend to be stable. It also automatically encourages the ‘buy low, sell high’ principle. Some negatives include its neglect of smaller, high-growth companies and the fact that high dividend yield can sometimes be a signal of financial distress in a company.

Is the ‘Dogs of the Dow’ strategy suitable for all types of investors?

It’s most suitable for conservative, risk-averse investors looking for stable dividend income and potential for modest capital appreciation. It may not be ideal for growth-focused investors or those looking for quick returns.

How often should I review or adjust my portfolio if I follow this strategy?

Typically, you would adjust your portfolio once a year using the ‘Dogs of the Dow’ strategy. You’d buy the 10 DJIA stocks with the highest dividend yield at the start of the year and hold onto them until year’s end.

Does the ‘Dogs of the Dow’ strategy take into account company fundamentals?

No, this strategy does not involve any thorough analysis of the company’s financial health or market position. It’s based entirely on dividend yield. It’s important to keep this in mind as high yield can sometimes indicate a company in distress.

What are the transaction costs of this strategy?

The costs might be higher than a buy-and-hold portfolio as you are buying and possibly selling ten stocks once a year. These costs will depend on your broker’s fee structure. Always take transaction costs into account when assessing potential profitability of an investment strategy.

Related Finance Terms

Blue-Chip Stocks
Dividend Yields
Dow Jones Industrial Average (DJIA)
Value investing
Stock Market Indicators

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