Category Archives: Dogs of the Dow

Dogs of the Dow Revisited

The “Dogs of the Dow” are the ten highest yielding stocks in the Dow Jones Industrial Average.  The reason they were referred to as “Dogs” is because stocks with unusually high dividend yields are often stocks whose prices have dropped, sometimes dramatically, because of bad news.

American companies, unlike their European counterparts, try to keep their dividends steady or increase them over time.  If they run into problems, including earnings declines, reducing the quarterly dividend is usually the last step.

To give an example, if a company whose stock which is priced at $100 per share pays a $2.50 dividend it is said to have a 2.5% yield.   If the company runs into problems and its share price drops to $50, the dividend yield is now 5.0%.  Thus it becomes a “Dog.”

Most companies run into problems from time to time: sales slow down and investors sell to invest in the next new thing.  That’s what happened to McDonalds a few years ago.  When oil prices dropped sharply so did the price of oil company stocks.  When natural resources prices dropped because of reduced demand so did the price of companies like Caterpillar which makes mining equipment.  Technology goes in and out of favor for various reasons and so does the price of tech stocks.

But most companies learn how to cope with adversity and make the appropriate changes to make a comeback.  That’s what often happens and it provides a way for investors to buy companies when they are cheap and make a profit.

The Dogs of the  Dow are a method of creating a portfolio of high yielding but out-of-favor stocks in the expectation that most will recover and provide a nice profit.

 So how have the “Dogs” done over the past 5 years?  We have tracked the performance of the “Dogs” using the share prices and yields of the 10 highest yielding DJIA stocks as of the last trading day of the previous year.  Here are the results:

  • 2011          16.4%
  • 2012          10.1%
  • 2013          19.1%
  • 2014         10.6%
  • 2015           2.9%

These returns are “total returns” and include dividends but do not include fees or expenses.  It should also be noted to these returns are different if the starting point was not the value as of the end of the prior year and the ending point was different.  It should also be noted that a 10 stock portfolio is not properly diversified and I have simplified the process of buying, trading and balancing the “Dogs.”

As a final note, this strategy was popular in the 1990s and as it became more popular it became less effective.  In addition, as technology stocks gained popularity in the late 1990s, the “Dogs of the Dow” lost money as investors moved massively away from old-line DJIA stocks and into the tech sector.  As they say in the prospectuses, past performance is no guarantee of future results.

For more information, contact us.

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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 boom became the new rage. It’s making a come-back now.

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Apple Joins the Dow

From the Wall Street Journal


Apple will join the Dow Jones Industrial Average this month, a long-anticipated change that adds the world’s most-valuable company to the 119-year-old blue-chip index.

The move is the latest milestone for Apple, which has emerged in recent years as the standard-bearer for a resurgent U.S. technology sector. The Cupertino, Calif., company in January reported latest-quarter net income of $18 billion, the largest quarterly profit on record, fueled by roaring sales of iPhones.

Apple will replace telecommunication giant AT&T, according to S&P Dow Jones Indices, the unit of McGraw Hill Financial Inc. that owns the Dow.

This will affect the Dog of The Dow since AT&T is currently the highest yielding DJIA stock.

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How do you get income with interest rates as low as they are?

I was reminded recently how low interest rates were when I downloaded my investment account activity into Quicken. Each account with a money market balance received a few pennies worth of interest, not enough to buy a cup of coffee. Certainly not enough to buy a Happy Meal. The average money market fund yields 0.02%. Every $1,000 investment will give you 20 cents in a year. And that’s before taxes. You could make more money collecting bottles at the side of the road.

There are some alternatives. One way is to invest for growth and forget about income. You can always spend some of the growth when you need the money.

But for those who want to see income flowing into their accounts, there’s always the “Dogs of the Dow.” The “Dogs” are members of the 30 Dow Jones industrial average with the highest dividend yields. This may be the result of a drop in prices, hence the name. For example, two of the highest yielding stocks in the DJIA are oil stocks which have declined in price even as they increased their dividends.

The current yield on the “Dogs” portfolio is over 3.5% and last year the total return (dividends plus capital appreciation) was over 10%. For more information on this strategy, contact us.

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