The Dogs of the Dow

The “Dogs” are the ten stocks in the Dow Jones Industrial Average (DJIA) that have the highest dividend yield. They are referred to as Dogs because the stocks with the highest yields are often those that are out of favor with investors and whose prices have declined significantly.

The Dow is made up of 30 stocks that are leaders in their industry.  They are generally though of as “Blue Chips.”  All of the stocks in the DJIA pay a dividend. Their yield is determined by dividing their annual dividend by the stock price. For example, as of December 31, 2014, AT&T was one of the 30 stocks in the DJIA. At that time it had an annual dividend of $1.84 and was priced at $33.59. Dividing $1.88 by $33.59 gives us a dividend yield of 5.48%, making it the highest yielding stock in the DJIA.

One of the reasons for the high yield is that AT&T declined in price by about 4.5% in 2014 while keeping its dividend level.  70%  of the other Dogs of 2015 also declined in price while keeping dividends level. In fact, seven out of the ten actually raised their dividends even as their prices declined.

This price drop coincided with an over-all market increase of over 10%.  For the smart investor this provides an opportunity for bargain hunting.

The market moves in cycles. Some companies run into company specific problems that cause their stocks to decline. Still others lose favor because of the industry they are in. Whatever the reason, it becomes a top management priority to fix the problem and get the stock moving back up. Their bonus depends on it.

The Dow Dogs of 2015 were AT&T, Verizon, Chevron, McDonald’s, Pfizer, General Electric, Merck, Caterpillar, ExxonMobil and Coca Cola.

Keeping in mind the old maxim that the way to make money in the stock market is to buy low and sell high.  Buying the Dogs provides an opportunity for investors who are looking for a simple way of buying high quality stocks when they go “on sale.”  While there is no guarantee that these stocks will turn around and go back up, the chances are fairly good that some will and that will lead to a positive over-all return.

As an added advantage, investors who buy the Dogs get an above-average income from a steady stream of dividends that these stocks produce. There is even a tax bonus since dividends from these stocks are considered “qualified dividends” for tax purposes and are taxed at a lower rate than ordinary income.

The investor who follows the Dogs strategy strictly will review his portfolio annually and sell those stocks that are no longer the highest yielding. They will be replaced by the new Dogs. By doing this the investor if forced to sell his biggest winners and replace them with the new, lower priced, Dogs.  While selling our winners and buying stocks that are out of favor goes against human nature, it is a time tested strategy that has worked well over long periods of time for the disciplined investor.

The person most responsible for popularizing the Dogs of the Dow Strategy was Michael O’Higgins who wrote a book “Beating the Dow” in 1991. The strategy worked well for a number of years but fell out of favor at the end of the decade when the dot.com boom became the new rage. It’s making a come-back now.

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