Analyzing the Effectiveness of the Dogs of the Dow Investment Strategy

Analyzing the Effectiveness of the Dogs of the Dow Investment Strategy

One popular investing strategy that has gained attention among dividend hungry investors is the Dogs of the Dow. Coined by investor Michael O’Higgins in the early 1990s, this strategy involves buying the 10 highest-dividend yielding members of the Dow Jones Industrial Average at the beginning of each year. The goal is to not only receive cash payouts but also benefit from potential price appreciation. While the theory behind the strategy suggests that it may be successful due to the high quality tilt of the Dow components and the potential rebound of stocks with falling prices, it is important to critically analyze the strategy and assess its effectiveness.

The Dogs of the Dow strategy is based on the assumption that the Dow Jones Industrial Average consists of established and financially stable companies. By focusing on the dividend yield, which often rises when a stock price falls, investors following this strategy believe they can identify undervalued stocks that may experience a rebound in the future. Additionally, with the options market indicating a potential rate cut by the Federal Reserve in 2024, stocks with healthy dividend yields could be attractive to investors seeking income.

The Performance of the Dogs of the Dow

While the Dogs of the Dow strategy has performed well in certain years, it is not a guaranteed winner. In 2022, for example, the Dogs outperformed the broader market during a period of equity market decline. However, in 2023, the strategy has lagged behind the S&P 500 as certain stocks, known as the “Magnificent 7,” have led the market higher. As of Friday, a portfolio following the Dogs of the Dow strategy would have yielded a total return of just 6.7% for the year, which is slightly worse than the full Dow and considerably below the S&P 500 and Nasdaq Composite.

Changes in the Dogs List for 2024

Due to underperformance, only two stocks are expected to break into the top 10 dividend yields for the Dogs of the Dow list in 2024. JPMorgan and Intel are on track to be replaced by Coca-Cola and Goldman Sachs. It is important to note that the composition of the list may still change by the end of the year.

While investors can follow the spirit of the Dogs of the Dow theory without purchasing all 10 stocks, many still choose to do so. Kevin Simpson, founder and chief investment officer at Capital Wealth Planning, currently owns six of the ten names on the preliminary 2024 list, including Coca-Cola, IBM, and Verizon. He highlights Verizon as a stock that has stabilized after a tumultuous period and is improving its fundamentals. Despite having significant debt, Verizon strategically locked in low interest rates before rate hikes, which positions them favorably.

The Dogs of the Dow investment strategy, popularized by Michael O’Higgins, offers a simple approach for dividend-focused investors. However, its effectiveness may vary from year to year, and it is not without risks. While certain market conditions, such as declining interest rates, may provide favorable conditions for the strategy, performance can still lag behind broader market indices. It is essential for investors to critically evaluate the strategy, consider individual stock fundamentals, and adapt it to their own investment goals and risk tolerance before incorporating it into their portfolio.


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