Dogs of the Dow – A Look Back at 2015 & Forward to 2016

The volatile 2015 has come to a close and we're back to review the viable strategy known as "Dogs of the Dow". At this point, the history of this strategy can be found all over the internet. However, we will review the 2015 performed as well as display what 10 stocks one would consider for this strategy.

The average return from the Dogs were -1.23% which was worse than the S&P 500 (-0.7%) but better than the Dow Jones Industrial (-2.2%). The best performer was McDonald's (MCD) (26.1%) and biggest decline came from Caterpillar (CAT) (-25.8%). It is a second consecutive years that this strategy lagged the market. One statistic we do not see is the rate of increase on the dividend. In 2014, average dividend yield rose by 1.8%. The dog of 2015 started the year with yield of 3.59% and ended the year at 3.85%, an increase of 7.3%. This statistic is impressive given our low rate environment.

The big question on everyone's mind is, does this strategy work?  We don’t pretend to know the answer to that as there is no single strategy that will work consistently.  However, we believe that the "Dogs of the Dow" has its place. The strategy worked once (in 2013) over the past 4 years and buying the market (S&P 500) would have yielded better result.  That being said, the strategy might be fitting for income investor who are capable and willing to withstand the volatility in the market.

What’s In Store for 2016?

We will reiterate that NLO team do not have a strong view on the strategy and tracking it is simply an opportunity to study in hope that we learn something along the way.  The table below highlights 10 companies that are consider the Dog of the Dow for 2016.

Alternative Strategy

One thing to note as you filter through the 2016 list is that there are sectors that will likely payout higher portion of their net income in dividend (i.e. Utilities, Telecom, Consumers). As such, we often see the same companies show up on this list (Verizon, Pfizer). Companies with low payout ratio never appears on the list (American Express, Goldman Sachs). As such, we offer alternative list call 'Dogs of NLO' back in 2013.  The premise of this alternative view is to assess the 10 companies that were trading near its yearly low rather than highest dividend yield.  Three years gone and our dogs have out performed the traditional one by 8%.  Since the start of 2013, the average return was 38% which trailed the market (39%) and outstrip the conventional Dogs of the Dow (29.5%).   The biggest driver to this success may be from the rise in dividend yield.  Assessing yield based on original cost, one will find that yield rose faster from our alternative strategy (see table below).

By no mean do we believe our strategy to be a better one, but it is to offer readers a different view.  Below are the our Dogs of the NLO for 2016.  Let’s come back a year (or two) from now to assess the viability of this strategy.