Category Archives: dog of the dow

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.

The new year is right around the corner and we’re not letting the fiscal cliff stop us from searching for investment ideas.  We've decided to turn to an old strategy, the Dogs of the Dow which was introduced by Michael O’Higgins, for some potential opportunities.  The Dogs of the Dow strategy suggests that you buy the top ten highest yielding stocks of the Dow Jones Industrial Average at the beginning of  each year.

Below is the performance of the "Dogs" for 2012.

The top 10 highest yielding companies of the Dow averaged a return of +6.2% compared to the S&P 500 gain of +12.7% and our NLO portfolio gain of +7.4%.  The biggest laggard of the group was Intel (INTC) which is one of our top holdings, down -9% since our purchase.  Additionally, it should be noticed that Kraft Foods (KRFT) is no longer a component of the Dow Jones Industrial Average but has been the best performer of all ten companies.  As pointed out in our 2012 Nasdaq 100 Re-Rank Review (found here), stocks dropped from an index normally outperform, overall.  In the case of KRFT, it was dropped late in the year after spinning off a unit.

If tomorrow was the beginning of the new trading year, these companies would be the Dogs of the Dow for 2013.

There are eight companies that are being carried over from the previous year.  Hewlett-Packard (HPQ) and McDonald’s (MCD) are the new additions.  Hewlett-Packard made the list after the stock slumped -45%.  Interestingly, HPQ has the lowest payout ratio using next years estimated earnings of $3.48.

The primary issue we have with the "Dogs of the Dow" strategy is that it assumes all 30 companies have similar retained earnings and payout ratios.  However, we believe that the dividend yield is a relative valuation and not absolute figure.  As an example, utilities and telecom companies will typically have higher yields than those of other industries such as technology.

As an alternative, we have come up with a different approach to the "Dogs" strategy to determine if there is any merit to our "relative value" assessment.  Instead of looking at the 10 highest yielding stocks of the Dow Jones Industrial Average, we will look at the top 10 stocks closest to their respective 52-week low.  We'll call this ‘Dogs of NLO’.

Here are the top 10 companies we came up with for 2013.

It should be noticed that the dividend yield is considerably less than that of the Dogs of the Dow strategy.  Some could argue that having a low yield will likely result in a lower return, however, as we've demonstrated in an article dated titled "Low Yielding Stocks Offer Exceptional Gains" (found here), the one year gains for low yielding stocks can be outsized.  In another article dated November 10, 2010, titled "Comparing Two Dividend Strategies" (found here), a comparison of low dividend yielding stocks to high dividend yielding stocks, the low yielding stocks have outperfomed by an ever increasingly wide margin as time has passed (2-year updates found in an article titled "Comparing 2 Dividend Strategies: Redux").

Again, this article is to provide a look back at the Dogs of the Dow performance in 2012 and possible picks for 2013.  While we have offered alternative strategies, we haven’t back tested it therefore we cannot and will not guarantee the outcome.  However, we feel strongly that it has a higher chance of outperforming the strategy initiated by Michael O’Higgins in 1991. Only time will tell, so we'll be sure to check  back for a review one year from now.

Note: We've recently written about a technical breakout in Caterpillar (CAT) so we believed 2013 will be a great year for the stock.