Different Takes on “Dogs of the Dow”—Part One

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Different Takes on “Dogs of the Dow”—Part One

While some analysts may write off the nearly thirty-year-old “Dogs of the Dow” theory as antiquated, Ian Cooper of chasingmarkets.com disagrees. “Plus,” Cooper adds, “we have to remember that each of the Dogs also pays a healthy dividend.”

Antiquated or not, “Dogs of the Dow” is hardly new to investor vocabulary. The concept—out of the 30 stocks that make up the Dow Jones Industrial Average, the strategy involves choosing the ten with the highest dividend yield. The premise, as Investopedia explains, is that blue chip companies such as those included in the DJIA rarely alter their dividend payouts. The dividend can thus be used as a measure of the average worth of the company. A high yield, the logic is, can mean the company is near the bottom of its business cycle.

Popularized in 1991 by Michael B. O’Higgins, “Dogs of the Dow” represented a twist on a then 40-year-old concept—selecting stocks based on price-earnings ratios. Back-testing to the 1920s, O’Higgins found that the “Dogs of the Dow” would have consistently outperformed the general stock market.

Yun Li, writing for CNBC in January 2019, refers to “Dogs of the Dow” as “one of Wall Street’s classic investing strategies, perhaps the most hands-off one,” and reported that during 2018, the “Dogs” had kept investors relatively safe, proceeding to introduce the 2019 “Dogs” list, consisting of:

  • IBM
  • Exxon Mobil
  • Verizon
  • Chevron
  • Pfizer
  • Coca-Cola
  • JP Morgan Chase
  • Proctor & Gamble
  • Cisco
  • Merck

Earlier, while halfway through 2019, Al Root reported in Barron’s, “the ‘Dogs of the Dow’ are Neck and Neck With the Stock Market.” JPMorgan Chase and Coca-Cola were the top dogs, Root notes. The beauty, he remarks, of the Dogs of the Dow strategy, is that “it’s a useful tool to identify bargains among large, blue-chip American companies.”

There’s certainly no scarcity of weaknesses pointed out by critics of the “Dogs of the Dow.” Stockscreening101 cites a few:

  • Only U.S. companies are included (investors miss growth in emerging and foreign markets).
  • No longer should large companies be viewed as “too big to fail”; it would be better to screen a universe of large-caps broader than those in the DJIA.
  • The very popularity of the “Dogs of the Dow” strategy works against its success.

Further points of criticism are listed by wallstreetphysician.com:

  • The strategy requires rotation of stocks every year, triggering possible short-term capital gains.
  • Ten stocks are too few for proper portfolio diversification (the authors suggest a high-dividend index fund).

Over the years, several variations on the “Dogs of the Dow” strategy have been offered, in answer to those criticisms, including:

  • Small Dogs—Out of the ten “dogs,” the five with the lowest share prices are chosen.
  • Motley Fool Dogs—a four-stock variation of Small Dogs.
  • “Dogs” portfolios with different starting dates and holding periods.

As wealth managers, Sheaff Brock’s Dave Gilreath notes, Sheaff Brock “takes a bullish approach” to the “Dogs of the Dow,” while at the same time putting a greater emphasis on downside risk. Stay tuned for PART TWO of this blog post to learn more about the Sheaff Brock “Bulls of the Dow” portfolio strategy … .

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