The Dogs of the Dow is a straightforward investment strategy first introduced by Michael B. O’Higgins in his book Beating the Dow. The procedure is very simple. At the end of the year, look at the Dow Jones Industrial Average index, pick the ten stocks with the highest yield, and invest an equal amount of money in each stock. Hold these stocks for the entire year and repeat the process again next year.
Dogs of the Dow Stock Picking Process
Step 1. After the close of the last trading day, start with the Dow 30 Stocks and sort by Dividend Yield like this list at Dividend.com.
Step 2. Buy an equal amount in the ten stocks with the highest yield. If you pulled the date on 12-31-2019, you would have this list of 2020 Dogs of the Dow:
| 2020 Dogs of the Dow | Current Dogs of the Dow (July 2020) | ||
| Stock | Yield | Stock | Yield |
| XOM | 4.99% | XOM | 7.96% |
| IBM | 4.82% | CVX | 5.54% |
| VZ | 4.03% | IBM | 5.45% |
| CVX | 4.02% | PFE | 4.51% |
| PFE | 3.91% | WBA | 4.48% |
| MMM | 3.39% | JPM | 3.89% |
| WBA | 3.21% | MMM | 3.78% |
| CSCO | 3.00% | KO | 3.65% |
| KO | 2.97% | CAT | 3.23% |
| CAT | 2.80% | CSCO | 3.16% |
| Source: Dogs of the Dow | Updated 7-3-2020 | ||
Step 3. Hold all ten stocks for the full year.
Step 4. At the end of the year, pull your new list of Dogs of the Dow
Step 5. Sell stocks that are no longer on the list and buy new stocks that were not on the previous list, and make sure you have an equal amount of money invested in each stock.
The Rationale Behind the Dogs of the Dow Strategy
The rationale behind this strategy is that Dow 30 stocks are strong, established, and profitable companies, so they are reasonably safe. If the stock is taking a beating right now, it is bound to recover. So it is logical to pick the ten stocks with the highest yield because the drop in stock price causes the yield to rise. Since these established companies rarely lower their dividend payout, the yield is a good indicator that the price has dropped.
Specifically:
Dividend Yield = Annual Dividend Payout ÷ Share Price
When the share price goes up, the dividend yield drops; therefore, you will most likely end up with a partially new set of stocks to invest in next year.
Dogs of the Dow Historical Performance
Based on the data provided by Dogs of the Dow website, this strategy was able to beat both the Dow Jones Industrial Average and the S&P 500 in all the periods:
| Investment | 1 Year | 3 Year | 5 Year | 10 Year | Since 2000 |
| Dogs of the Dow | 0.00% | 14.80% | 11.60% | 15.60% | 9.00% |
| Small Dogs of the Dow | 0.80% | 9.30% | 10.50% | 15.90% | 10.00% |
| Dow Jones Industrials | -3.50% | 13.70% | 10.30% | 13.60% | 7.50% |
| S&P 500 | -4.40% | 9.80% | 8.90% | 13.70% | 6.40% |
Problems with Dogs of the Dow Strategy
There are a couple of issues with the Dogs of the Dow investing strategy.
1. Lack of Diversification
This is probably the biggest problem with this strategy. You’re only investing in 10 stocks; they are all U.S. Large Cap companies and the current companies only spread across seven sectors with a more substantial concentration in Energy, Industrials, and Information Technology.
The only way to fix this problem is to make the Dogs of the Dow a small portion of your total portfolio.
2. Tax Gains and Losses
The original version of this strategy indicates that you should make all your trade on the first trading day each year. This means that you could be losing out on claiming tax-losses (at least one year sooner anyway) and paying short-term capital gains tax (instead of the much rate of lower long-term capital gains).
To fix the tax-loss issue, you could sell any losing stocks that will not be included in the next year’s Dogs before the last trading day of the year. This should not happen that often, because most likely, the losers will be included in the next year’s Dogs of the Dow portfolio unless it gets dropped from the Dow 30 index.
To fix the short-term capital gains issue, you could hold your winners for at least one year and one day before selling them. This way, the gains are treated as long-term capital gains.
3. Start Date
The original version of this strategy indicates that you should start at the beginning of the year, but you can start on any day of the year using the same strategy.
As mentioned above, you could go to a site like Dividend.com and look at the most current list for the day you choose to start.
4. High Turnover
Another issue is you’re selling about 20-40% of your portfolio every year, and most of the time, you’re selling good companies that you would most likely hold on to for the long-term if this strategy didn’t dictate it. For example, JNJ in 2013, INTC and MSFT in 2014, MCD and KO in 2015, PG and WMT in 2016, and so on are all excellent stocks that could be held long-term
| 2013 | 2014 | 2015 | 2016 | 2017 | 2018 | 2019 | 2020 |
| T | T | T* | VZ | VZ | VZ | IBM | XOM |
| VZ | VZ | VZ | CVX | PFE | IBM | XOM | IBM |
| INTC | MRK | CVX | CAT | CVX | PFE | VZ | VZ |
| MRK | INTC | MCD | IBM | BA | XOM | CVX | CVX |
| PFE | PFE | PFE | XOM | CSCO | CVX | PFE | PFE |
| DD | MCD | GE | PFE | KO | MRK | KO | MMM |
| HPQ* | CVX | MRK | MRK | IBM | KO | JPM | WBA |
| GE | GE | CAT | PG | XOM | CSCO | PG | CSCO |
| MCD | CSCO | XOM | WMT | CAT | PG | CSCO | KO |
| JNJ | MSFT | KO | CSCO | MRK | GE* | MRK | CAT |
| 3 | 3 | 4 | 2 | 2 | 2 |
* These companies were dropped from the Dow
5. Transaction Fees
Unless you’re using a free broker, you’d have to pay for ten trades when you start. At the beginning of the year, you’re like to do 2-4 selling trades, 2-4 buying trades, 6-8 rebalancing trades. These trades could add up very quickly.
A broker like M1 Finance can make this strategy super simple to manage. You just have to set up the portfolio once at the beginning. As you get dividend payments throughout the year, the system will purchase more of the worst-performing stocks (helping you cost average down). When it’s time to revamp your portfolio, you could swap out the outgoing stocks for the new one and just hit rebalance — all of this at $0 trading fee.
Dogs of the Dow Variations
There are several variations of the Dogs of the Dow that is worth mention:
Small Dogs of the Dow
You start the same way as Dogs of the Dow. After you pick out the Dogs, sort the list by the share price. The five stocks with the lowest share price are your Small Dogs of the Dow. You invest the same amount of money in each of the five stocks.
According to the Dogs of the Dow website, this strategy performed even better than the Dogs of the Dow.
Dow 4
This is the same as the Small Dogs of the Dow, but you drop the lowest price stock leaving you with just four stocks. You invest the same amount of money in each of the four stocks.
The Foolish Four
The Motley Fool popularizes this variation in their book, The Foolish Four: How to Crush Your Mutual Funds in 15 Minutes a Year.
With this strategy, you start with the Dow 4, but you invest 40% of your money in the lowest price stock and 20% each in the other three stocks.
Bottom Line
Overall, I like the overarching concept of the Dogs of the Dow, specifically, invest in high-quality companies when their share prices are down.
I do have a small portion of my total portfolio investing using the Dogs of the Dow strategy, but with some improvements over the original.
- First, I hold the winners for at least 1 year and 1 day to take advantage of long-term capital gains, or I may decide not to sell the position if I feel it is an excellent long-term buy and hold stock.
- Second, I review the Dogs of the Dow list monthly and add any new dog to the portfolio. Third, I consider the losers and decide if I want to keep them or sell them for tax-loss harvesting.
Everything I mentioned here can be accomplished easily with M1 Finance.
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Pinyo Bhulipongsanon is the owner of Moolanomy Personal Finance and a Realtor® licensed in Virginia and Maryland. Over the past 20 years, Pinyo has enjoyed a diverse career as an investor, entrepreneur, business executive, educator, financial literacy author, and Realtor®.
