Are The Dogs of the Dow For You?

The Dogs of the Down Dividend strategy

If you are looking for a really simple income/dividend strategy you might consider the “Dogs of the Dow” approach.

But does this simple technique still work?

For 2021 Dogs of the Dow deliver a 4.1% dividend on average.

Here is how to get started with this contrarian strategy:

Step 1: After the final trading day of the year, you identify the 10 highest-yielding stocks in the Dow.

Step 2: you the buy all 10 stocks in equal amounts.

Step 3: Hold these stocks for the full year and then in January of the next year make adjustments based on the highest-yielding stocks in the Dow at that time.

So for some this is a really simple approach. You only have to make adjustments once a year and you have a nice portfolio of 10 blue-chip stocks that typically out-yield the S&P 500, and currently offer 2.5 times more dividends than the broad market index.

Rather than using something like the price earnings ratio, the Dogs of the Dow approach uses dividend yield to determine which stocks to buy at the beginning of each year.

But this is not a fool-proof approach to investing. The Dogs of the Dow strategy produced a negative 8% total return across 2020, while the 10 next-best-yielding stocks produced a modest 3.2% return, and the 10 lowest yielders—in theory, the 10 most “overpriced” stocks—carried the Dow with nearly 25% returns.

Looking back, if you had invested in the Dogs of the Dow for each of the past 20 years you would have been rewarded with a return of 10.8%. Just investing the Dow Jones Industrial Average would have resulted in exactly the same return – 10.8%.

So while historically this strategy works, it may have also resulted in additional trading costs and taxes on gains each year that a buy and hold investor would not incur. All of these costs mean you have less money in you pockets after 20 years. Of course we are only talking about the dividends here as an income source. Price appreciation on your shares would be a different matter.

Our recommendation is to implement this approach with a note of caution. Plus this only works if you can buy equal shares of all 10 of stocks in Dogs list. For many investors starting out this might be too expensive and may not continue to produce the returns you expect.