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Dogs Of The Dow Explained

Dogs Of The Dow Explained

. 4 min read

In this article

What Is The Dogs Of The Dow Strategy?

The Dogs Of The Dow is a popular investment strategy published in 1991 by Michael B. O'Higgins that consists of buying the ten (10) stocks of the Dow Jones Index with the highest dividend yield and rebalance the portfolio annually.

Created in 1896 by Charles Dow, the Dow Jones Industrial Average (DJIA) is a stocks index composed of the thirty (30) largest public companies listed on the Nasdaq and the NYSE.

So why are the ten (10) highest yielding stocks in the index called the Dogs Of The Dow? The high dividend yield stocks often represent companies that investors are nervous about holding in  their portfolio, so they are undesirable, or "dogs." Our apologies to all dogs that find the name offensive. :)

The index's performance tells a completely different story. The Dogs Of The Dow beat both the S&P500 and the DJIA indexes in the twenty (20) year period since the beginning of this millennium. And so did its popular variant–the Small Dog Of The Dow.

The Small Dogs Of The Dow (SDOD) strategy consists of buying the five (5) stocks of the DJIA index with the highest dividend yield. Over the last twenty (20) years, SDOD has performed better than the Dogs Of The Dow.

Dogs Of The Dow Historical Performance

As depicted below, in the  20-year backtest period between December 31, 1999, and December 31, 2019, both strategies beat the market.

While the dogs of the dow and the small dog of the dow posted a 9.5% and a 10% CAGR respectively, the S&P500 and the DJIA returned just 7.7% and 8.4% annually.

Source: dogsofthedow.com

Dogs Of The Dow X

In the mid-1990s, the team at dogsofthedow.com began testing different variations of the strategy and found a statistically significant method to outperform the Dow and the Dogs of the Dow–the Dogs Of The Dow X.

The Dogs Of The Dow X portfolio consists of the seven (7) stocks of the DJIA with the highest dividend yield, while the Small Dogs Of The Dow X invests in the three (3) highest yielding stocks.

In the backtest period between December 31, 1999, and December 31, 2019, they generated a 10.8% and a 12.5% CAGR, respectively, beating the original versions of the strategy.

Although the Small Dogs Of The Dox X outperformed the others in the backtest period, I would be very cautious with this strategy, since it reduces the number of stocks in the portfolio to three (3), exposing you to higher portfolio concentration risk.  

Dogs Of The Dow: Pros & Cons

Although the strategy is based on a very simple rule, it has proved to be really effective in the past. However, there are some disadvantages. Let's review the pros and cons of this popular investment strategy.

Pros

Passive Income: The strategy is a great option for passive income investors. Besides having a high dividend yield, the Dogs Of The Dow are some of the biggest and strongest companies in the United States, so shareholders can sleep well at night and have their money work for them.

A Simple Strategy: Highly complex investment strategies can lead investors to make mistakes if they are difficult to execute. In times of uncertainty, it can be extremely helpful to have a simple and effective rule to follow.

Cons

A Limited Metric: As we discussed in the dividends vs. buybacks article, more businesses opt for a combination of dividends and buybacks since it is a more tax-efficient solution. You may miss some great investment opportunities by focusing just on dividends.

Pro Tip: To get the complete view of how a company is rewarding shareholders, you can use the shareholder yield, which is the sum of buyback yield, debt-paydown yield, and dividend yield. Learn more here.

A Limited Universe: By picking only the companies included in the DJIA, you only have 30 stocks to choose from. The best opportunities are often where no one else is looking. You can find them with the Finbox Screener, which covers 100,000+ stocks on 135+ exchanges globally.

Average Performance: If you want to manage an investment portfolio instead of buying an index fund, it must be worth it effort. In this article, you can learn about three (3) investment strategies that performed much better than the dogs of the dow.

How To Find Dogs Of The Dow

The Finbox Screener makes it easy to find the Dogs Of The Dow. Whether you’re interested in three, five, seven, or ten variant of the strategy, you can find the list of Dogs here: Dogs Of The Dow Screener

Dogs Of The Dow List

Dogs Of The Dow August 18, 2020
Ticker Name Dividend Yield
XOM Exxon Mobil Corporation 8.2%
DOW Dow Inc. 6.3%
CVX Chevron Corporation 5.7%
IBM International Business Machines Corporation 5.2%
WBA Walgreens Boots Alliance, Inc. 4.5%
VZ Verizon Communications Inc. 4.2%
PFE Pfizer Inc. 4.0%
JPM JPMorgan Chase & Co. 3.6%
MMM 3M Company 3.6%
CSCO Cisco Systems, Inc. 3.4%