One of the most popular strategies for individual stock pickers is investing in stocks known as the “Dogs of the Dow.” This strategy gives you a no-fuss way to invest. And it makes it easy to rebalance your portfolio each year.
Here's what you need to know about using the Dogs of the Dow as an investing strategy… as well as a list of the Dogs of the Dow stocks for 2022.
What Is the “Dogs of the Dow” Strategy?
Using this strategy, you invest your money in the 10 companies on the Dow that have the highest dividend yield. When you use this strategy, you can expect to see solid appreciation as well as benefit from the dividend payouts received throughout the year.
At the end of the year, your portfolio will likely have beaten the performance of the overall Dow. For example, in 2018, if you had followed the Dogs of the Dow strategy, you would have lost 1.6%. However, the DJIA as a whole lost nearly 6%. In fact, this strategy beat the overall Dow in eight of the 10 years after the Great Recession.
Although this strategy has been around for a while, Michael B. O'Higgins coined the term “Dogs of the Dow” in his 1991 book, Beating the Dow.
How to Invest Using the Dogs of the Dow
Let's say you have $20,000 to invest. You'd put $2,000 into each of the 10 Dogs of the Dow. At the end of each year, you change your portfolio allocations to the new Dogs of the Dow.
Each year, you make adjustments to your portfolio depending on the current Dogs. The Dogs change each year, because the composition of the Dow changes and dividend yields are figured using the prices of stocks.
After trading closes on the last day of the year, you take a look at the DJIA and rank the companies by dividend yield. The top 10 companies are the Dogs of the Dow. On the first trading day of the new year, you buy an equal amount of each of the Dogs.
Calculating the Yield Return
It's easy to find the dividend yields for stocks — just look up a stock on Yahoo Finance.
But in case you like math, the dividend yield is figured by dividing the amount of the year's dividend by the stock price. Let's take Coca Cola, symbol KO, one of the Dogs of the Dow for 2019, as an example. The closing price for KO on December 31, 2018, was $47.35. Coca Cola paid out $0.39 in each of the four quarters of 2018, giving us a total dividend of $1.56. So:
1.56 / 47.35 = 0.0329 = 3.29%
KO paid a 3.3% dividend yield for 2018.
Annual Adjustment of the Dogs of the Dow Portfolio
Adjusting your portfolio depends on how you want to proceed. One of the easiest ways to use this strategy is to simply sell all of your stocks at the end of the year, then divide up your total portfolio among the new Dogs.
However, if you have some losers and some of the Dogs are repeats (which is common), you could run afoul of the IRS wash rule and be unable to claim losses on your taxes.
On the other hand, if you sell stocks that have lost and they've fallen off the Dogs list, you can buy a new Dog stock and still claim any capital losses on your taxes.
Another approach is to evaluate which companies are dropping off the Dogs list and sell only those, maintaining your investments in the Dogs that continue from one year to the next. Use the proceeds from the old Dogs to buy shares of the new Dogs of the Dow.
You may need to make other adjustments in order to keep your investment amount in all of the Dogs the same at the outset of the year.
Finally, a good long-term strategy to boost your returns is to automatically reinvest your dividends. Because the Dogs of the Dow pay dividends, you can use those proceeds to buy further shares of the company.
The Theory Behind the Dogs of the Dow Strategy
The Dogs of the Dow have the most potential to see solid appreciation over the course of the year. A company with a high dividend yield is thought to be at a low point in its business cycle. It is simply lagging for now. Such companies still pay a high dividend relative to other companies on the Dow, and they are still fundamentally attractive. When things improve, the share price is likely to rise faster than other companies.
The added bonus of receiving a higher dividend payout and reinvesting it is where some of the ability to beat the DJIA as a whole comes in.
What Are the Dogs of the Dow for 2022?
Here are the Dogs of the Dow for 2022:
|Stock||2018 Year-End Dividend Yield||2018 Total Return|
|JPMorgan Chase (JPM)||3.28%||(7%)|
|Procter & Gamble (PG)||3.12%||4%|
|Cisco Systems (CSCO||3.05%||17%|
Pros and Cons of the Dogs of the Dow Strategy
Remember to consider the advantages and disadvantages. With any investment strategy, you could lose money. Additionally, it's important to understand the strengths and weaknesses of a strategy so that you can make adjustments based on your own risk tolerance goals over time.
Pros of the Dogs of the Dow
- It's a simple strategy. Dogs of the Dow is a simple and straightforward strategy, and you have to adjust your portfolio only once a year.
- Relatively low cost. With this strategy, you don't have to worry about paying a lot of trading fees. Some online stock brokers, such as Robinhood, even let you make free trades. And it won't cost anything to reinvest the dividends if you have a free reinvestment plan.
- Access to dividends. You have the chance to boost your portfolio and accelerate your earnings, because Dogs of the Dow focuses on DJIA companies with higher dividend yields.
- A reasonable limit to risk. Blue chips are considered a little less volatile than other stocks, such as biotechs or new companies. So they might not see the same price swings.
Cons of the Dogs of the Dow
- You can still lose money. It's possible to lose money with any investment strategy, including this one. If the market drops, you still run the risk of losing. Even if your portfolio loses less than the DJIA as a whole, you've still lost some money.
- You have to pay attention each year. You can't set it and forget it for several years. Companies drop off the Dow or cut their dividends. Or their stock price increases enough to drop them from being a Dog. As a result, there's a new list of Dogs of the Dow each year.
- It can be difficult to stick it out in a down year. As with any strategy, it can be tough to stick to the Dogs of the Dow strategy when the market is down. However, if you can power through, there's a good chance your portfolio will recover.
The Dogs of the Dow can be a solid stock-picking strategy if you want to give individual stocks a try. It's possible to use this strategy as a part of your overall investment portfolio, even if you index a portion of your portfolio or hold other assets.If you decide to incorporate the Dogs of the Dow strategy, make sure you understand your goals and your risk tolerance. And make sure the strategy will complement the other strategies you use for your portfolio.