Stock-Picking Strategies: Dogs of the Dow

The Dow Jones Industrial Average (DJIA) – created by Charles Dow in 1896 – is a price-weighted average of the 30 largest and most influential NYSE- and NASDAQ-traded companies. Often called “the Dow,” the DJIA is one of the oldest and most widely followed indices in the world. It’s often viewed as a barometer for the broader market: When financial news networks say, “The market is up today,” they are often referring to the performance of the Dow.

The Dogs of the Dow is an investing strategy – based on the 30 DJIA components – that was popularized by Michael O’Higgins in his book, “Beating the Dow.” The strategy is simple: After the stock market closes on the last day of the year, select the 10 highest-dividend–yielding DJIA stocks. Then, on the first trading day of the new year, invest an equal dollar amount in each of them. Hold the portfolio for a year and then repeat the process at the beginning of each subsequent year. It’s important to note that this is a long-term strategy: There have been years when the Dow has outperformed the Dogs (you should never expect the Dogs to outperform the Dow). It’s the long-term averages that investors rely on for positive results over time.

At the end of the year, add up the value of your portfolio and any money you want to add. Divide that number by 10. Let's say it comes to $2,000 per stock. Thenm see which (if any) of the current year's dogs made the new year's list. Sell the stocks that didn't and rebalance your portfolio so that you own $2,000 per company of both keeper dogs from the previous portfolio and new dogs for this year. If no stocks on the list change, you still need to rebalance.

Finding Stocks

You have several options for finding the Dow stocks that have the highest dividend yields:

• Do the math. There are only 30 Dow stocks, so it’s feasible to do the math yourself to find the dividend yields and then rank them in order, from highest to lowest. (Tip: It’s easy to sort if you enter the results in an Excel spreadsheet). The top 10 are the stocks you would include in your Dogs strategy. Try Investopedia’s Dividend Yield Calculator to get started.

• Have it delivered. Sign up for the free Dogs of the Dow Newsletter and you’ll receive the revised list each year as soon as it’s ready (note that you’ll receive other newsletters, as well).

• Search the web. Numerous websites maintain updated lists of the Dow 30 stocks that include dividend yields. Try Dividend.com: click on the Dividend Yield heading in the sortable table to view the top 10 dividend yields (see below for an example from July 27, 2017). Note that you can export the table to a CSV file if you have a Dividend.com Premium account.

Strategy Variations

Because of the strategy’s simplicity, many have tried to modify it to make it even simpler and higher yielding. The variations include:

• Small Dogs of the Dow. On the last day of the year, select the 10 highest dividend-yielding stocks as you normally would. Of these 10 Dogs, select the five that have the lowest stock price – these are the Small Dogs. Invest an equal dollar amount in each, hold them for a year, and repeat the next year. This variation is also called the Dow 5.

• Dow 4. Almost the same as the Small Dogs of the Dow, except you select the four highest-priced Small Dogs stocks, dropping the fifth.

• Foolish 4. Made famous by Motley Fool. Select the same stocks as the Dow 4, but allocate 40% of the portfolio to the lowest-priced stocks and 20% to the other three.