Stock Trading

Dow Dogs

What is the Dow Jones Index?

“Dogs of the Dow” is an investment strategy that attempts to beat the Dow Jones Industrial Average (DJIA) every year by skewing the portfolio toward higher-yielding investments. The general concept is to allocate funds to the 10 blue-chip stocks with the highest dividend yields among the 30 Dow Jones Industrial Average stocks. The strategy needs to be rebalanced at the beginning of each calendar year.

key takeaways

  • The Dow is a well-known strategy first released in 1991.
  • The strategy attempts to maximize investment returns by buying the highest dividend stocks the Dow Jones Industrial Average offers each year.
  • The strategy’s track record shows that it outperformed the index in the 10-year period following the financial crisis.

Learn about the Dow Jones Indices

Since the Dow is one of the oldest and most widely followed indexes in the world — often seen as a barometer for the broader market — market strategists base their investing techniques on certain components of the Dow Jones Industrial Average and don’t Not uncommon. The main reason for following the dog is that it provides a simple formula designed to roughly align with the Dow.

While not an entirely new concept, this strategy first became a popular fixture in 1991, following the publication of Michael B. O’Higgins’ book, beat the DowIn the book, O’Higgins also coined the name “Dog of the Dow”.

Dow Methodology for Dogs

Dogs of the Dow relies on the premise that blue-chip companies won’t change their dividends to reflect trading conditions, and as such, dividends are a measure of a company’s average value. By contrast, stock prices do fluctuate throughout the business cycle.

This should mean that companies with higher dividends relative to stock prices are near the bottom of their business cycles, so their stock prices are likely to grow faster than companies with lower dividend yields. In this case, investors who reinvest in high-dividend-yielding companies each year hope to outperform the overall market.

There are many ways to buy these securities. You can hand-pick individual stocks and build your own portfolio to invest directly in the Dow through an exchange-traded fund (ETF), or you can follow a Dow strategy – stocks with higher yields than the overall Dow. In fact, dogs tend to outperform the Dow over the course of the year.

The 2022 Dow is listed below.

Dow Jones Indices in 2022
stock code company dividend yield
1 Dow Dow 4.94%
2 VZ Verizon 4.93%
3 IBM IBM 4.91%
4 CVX Chevron 4.57%
5 WBA Walgreens 3.66%
6 MRK Merck 3.60%
7 AMGN Amgen 3.45%
8 Um 3M 3.33%
9 KO Coca Cola 2.84%
10 International Trade Centre Intel 2.70%
As of December 31, 2021

How Dow Jones Index Strategies Work

The idea is to make stock picking easier and relatively safe, the latter because the universe is limited to blue-chip stocks. As a strategy, the Dow goes like this – pick the 10 stocks with the highest dividend yields in the Dow Jones Industrial Average after the market closes on the last day of the year. Then, on the first trading day of the new year, invest an equal dollar amount in each of them. Hold the portfolio for one year, then repeat the process at the beginning of each subsequent year.

However, investing is never that simple for most non-professionals, especially when there are countless strategies. Therefore, the average individual investor should understand what they are doing with their money. As such, Dow tools abound. Just browse the internet for Dow Jones Indices views, commentary, analysis, calculators, charts, forecasts and stock screeners. There’s even a Dow Jones website.

Since this is a low-maintenance, long-term strategy that mimics the performance of the Dow Jones Industrial Average, it’s no surprise that the long-term results are similar. Over the years, the Dow has outperformed dog stocks and vice versa, but it has done impressively over time.

Sample performance comparison

The Dow suffered more losses than the Dow Jones Industrial Average during the 2008 financial crisis, but it did slightly better than the bellwether index in the decade that followed.

The cumulative effect of this performance year after year shows that although losses in 2008 outpaced the index, the strategy has taken hold and has delivered solid results over a decade.

From the beginning of 2008 to the end of 2018, investors who started with $10,000 and held DJIA will find their account has grown to approximately $17,350. However, investors who follow the Dow’s strategy will find that dividend payments make a big difference. Their ending balance was $21,420, showing the value of adjusting the position once a year.

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