A Bullish Approach to “Dogs of the Dow”—Part One

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A Bullish Approach to “Dogs of the Dow”—Part One

Nearly thirty years in use, the term “Dogs of the Dow” is hardly new to investor vocabulary. The concept—out of the 30 stocks that make up the Dow Jones Industrial Average, choose the ten with the highest dividend yield.

Dogs of the Dow is based on investors’ intent to “buy low, sell high.” The premise, as Investopedia explains, is that blue chip companies such as those included in the DJIA rarely alter their dividend payouts. The dividend can thus be used as a measure of the average worth of the company. A high yield, the logic is, can mean the company is near the bottom of its business cycle.

Back in 1991, Michael B. O’Higgins took a then 40-year-old concept—selecting stocks based on price-earnings ratios—and proposed a specific adaptation: investors should annually select the ten DJIA stocks whose dividend is the highest fraction of their price. O’Higgins back-tested his idea all the way back to the 1920s, finding that the “Dogs of the Dow” had consistently outperformed the general stock market and that another version, “Small Dogs of the Dow” (the five lowest price “Dogs”) had outperformed both the Dow and the S&P500.

Yun Li, writing for CNBC in January 2019, refers to “Dogs of the Dow” as “one of Wall Street’s classic investing strategies, perhaps the most hands-off one,” reporting that in 2018, the “Dogs” had kept investors relatively safe. Li introduces the new “Dogs” list, consisting of:

  • IBM
  • Exxon Mobil
  • Verizon
  • Chevron
  • Pfizer
  • Coca-Cola
  • JP Morgan Chase
  • Proctor & Gamble
  • Cisco
  • Merck

Halfway through 2019, Al Root reports in Barron’s, “the ‘Dogs of the Dow’ are Neck and Neck With the Stock Market.” JPMorgan Chase and Coca-Cola were the top dogs, Root notes. The beauty, he remarks, of the Dogs of the Dow strategy, is that “it’s a useful tool to identify bargains among large, blue-chip American companies.”

As wealth managers, Sheaff Brock’s Dave Gilreath notes, Sheaff Brock “takes a bullish approach” to the “Dogs of the Dow,” while at the same time putting a greater emphasis on downside risk. Read PART TWO of this blog post to learn more about the Sheaff Brock Bulls of the Dow portfolio strategy … .

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