Category Archives: Dogs of the Dow

Below we list the performance of the various categories of Dow Jones Industrial Average stocks as compared to the index.

The category highlighted in red is the original “Dogs of the Dow” where the ten highest yielding stocks are bought and held for one year and sold at the end of the year.  So far, the Dow is beating the Dogs of the Dow by almost 5%.

When contrasting the performance of the Dogs of the Dow against taking the opposite category, stocks providing the lowest dividend yield, we see that across all groupings, the Dogs of the Dow consistently underperform.

For each group, the data set that is thought to be “bad” generally outperformed the category that typically is thought to be “good.”  For example, the highest p/e stock bet lowest p/e stocks, lowest yield stocks beat highest yield stocks and highest p/b stocks beat out lowest p/b stocks (except top 2,3,4) .

Worth noting is the fact that the top 2,3,4 group of stocks only outperformed the top 1,2,3 group of stocks in both of the p/e categories.  This is a stark contrast to what we indicated occurred in prior years of data.

On January 1, 2019, we posted our list of the “Dogs of the Dow”.  In that list we broke down all the categories that we track.  Our closing remark was as followings:

“Our preference is for stocks in the highest p/e or lowest yield stocks.”

Our preference is based on evidence going back to 1996, which shows that low yielding stocks don’t outperform the index which is contrary to Michael O’Higgins book Dogs of the Dow,which claims that the way to beat the index is to invest in the ten highest yielding stocks at the beginning of each year. 

Additionally, the data has demonstrated that stocks with the highest p/e or lowest yield generally beat the index and crush the highest yielding stocks.  Below, we list the performance of the various categories of Dow Jones Industrial Average stocks as compared to the index.

So far,  the best performing category of stocks among the top ten, which is the best relative comparison to the top ten highest yielding stocks, is the lowest yielding stocks with a gain of +23.95%.  This gain exceeds the top ten highest yielding stocks by nearly 100%.

Not to be outdone, the ten highest p/e stocks gained +21.70% as compared to the ten highest yielding stocks with a gain of +12.42%. 

The changes related to DowDuPont (DWDP) has had a material impact on the data and has been excluded from the categories of the “ten highest p/e”, “ten lowest p/b”, and the “lowest 2,3,4: lowest p/b”. 

If the next best stock were added to the “ten highest p/e” category it would have increased the return to +22.92%, the “ten lowest p/b” group would have seen a reduction from +14.35% to +13.16% while adding CVX to the “lowest 2,3,4: lowest p/b” reduced the category performance.  

Below is the individual breakdown of the stocks and their performance. The data is as of July 5, 2019. Continue reading →

Below is the Dogs of the Dow for 2019 with the breakdown of the other categories that we track. Continue reading →

According to Wikipedia, the Dogs of the Dow, “…is an investment strategy popularized by Michael B. O'Higgins in 1991, which proposes that an investor annually select for investment the ten Dow Jones Industrial Average (DJIA) stocks whose dividend is the highest fraction of their price [highest dividend yield].”

So far, in the year 2018, the ten highest yielding stocks have gained +1.10% while the ten lowest yielding stocks have gained +13.67%, on average.  In the same period of time, the Dow Jones Industrial Average has gained +2.34%.

The distinction between the highest yielding stocks as compared to the lowest yielding stocks is very important because the whole purpose of the theory by Micheal O’Higgins is that you’ll be able to consistently beat the Dow Jones Industrial Average if you choose the ten highest yielding stocks every year.

As our January 6, 2018 posting on the top shows, in the period from 1996 to 2017, the “Dogs” (highest yielding stocks) routinely underperformed the DJIA annually.  Because most investors are not in the position to buy ten stocks at the beginning of each year, we have provided performance data on the first three stocks (1,2,3) and the next best stocks (2,3,4).

There are several conclusions that should be drawn from the commentary above:

• High yield equals high risk, even among blue chip category.
• Fewer stocks means greater volatility.
• Low yield DJIA stocks track momentum performance, exceptional reward with exceptional risk.
• If you want “average” performance buy the index fund.
• If you want exceptional return with more risk, buy the 2nd, 3th and 4th ranked stocks among the high p/e or low yield stocks.

What a year it was for the bull market in 2017, which naturally should have lifted all stocks and most asset classes. We've seen the rise in equities, real-estate, and new asset classes like crypto currencies. That being said, we'd take any opportunity to review strategies used in the market in an attempt to grow our assets. The start and end to the new year is a perfect stop to revisit a strategy known as the Dogs of the Dow.

In this piece, we're going to review the 2017 performance of the Dogs of the Dow and look back to the period of 1996 to 2017.

2017 Dogs of the Dow Performance Review

The purpose of any investment strategy is to exceed the performance of the stock market averages.  In the year 2017, the Dow Jones Industrial Average gained +25.10%.  The Dogs of the Dow, the 10 highest yielding stocks, gained +19.45%.

Knowing us, we can't leave well enough alone.  We asked ourselves, how good is the highest dividend yield performance?  To answer that question, we applied Charlie Munger's rule of "always invert" when confronted with a difficult question.  So we ran the performance numbers of the 10 lowest dividend yielding stocks.  One thing led to the another and we ended up with the following results.

Below is the performance table of the various fundamental attributes that we followed for the top 10 and top 3 ranked Dow stocks.  As you can see, the top 10 low yielding stocks gained +27.33%, exceeding the top 10 high yielding stocks by 7.88%.  More astoundingly, if you bought the top 3 low yielding stocks, you would have beat the top three high yielding stocks by +19.52%.

Looking at the performance of 2017, it could naturally be said that maybe the last year was a fluke.  However, when looking at the average performance of the same categories since 1996, we find that the high yielding stocks managed to get beat out by the low yielding stocks, easily.

Of all the categories since 1996, the Dogs of the Dow (top ten highest yielding)  was the worst performing metric by which to attempt to beat the Dow Jones Industrial Average.  The two metrics that have beat the Dow over the period from 1996 to 2017 are the improbable high p/e and high p/b.  We can't give an explanation for why these two approaches managed to do so well.

As a footnote to the last chart, to beat the Dow Jones Industrial Average by buying only the top three stocks, the best performers were (in descending order) high p/e, low yield and then the Dogs of the Dow. For some reason, the high p/e stocks beat the Dow in either the top ten or top three category.