How to Beat the Dow with Best-in-Breed ‘Dogs’

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The “Dogs of the Dow” is a time-honored investment strategy. And it’s as simple to follow as it has been effective in producing excellent results over the years.

Investment manager and author Michael O’Higgins popularized the strategy in his 1991 book, “Beating the Dow.” And very few investment strategies are as easy to follow as this one.

Step 1: On the last trading day of the year, simply select the 10 stocks with the highest dividend yield out of the 30 stocks that make up the Dow Jones Industrial Average (DJIA).

Step 2: On the first trading day of the new year, buy all 10 stocks in equal dollar amounts.

Step 3: Hold for one year and repeat at year-end.

On the surface, this sounds like an income-producing dividend stock strategy. But it’s actually based on finding the most undervalued stocks among the largest, most well-established blue-chip companies.

The idea is that by selecting the top 10 DJIA stocks by dividend yield (dividends divided by stock price), you are getting proven, high-quality stocks at a bargain price. This is perhaps because the stock was out of favor recently and near the bottom of its timing cycle.

And the strategy has a long-term performance pedigree. The Dow Dogs have posted total returns of 8.7% per year since 2000, often outperforming the DJIA over that stretch.

However, the Dogs of the Dow strategy doesn’t always finish Best in Show.

Last year the Dogs came up a bit short, with the strategy generating a total return of 16.3%, compared to a 20.8% gain for the entire Dow 30 list. In fact, the Dogs haven’t beaten the DJIA for the past four years.

This is probably due to the preference for growth stocks over value stocks in recent years. That’s especially true since the pandemic began, when technology growth stocks soared while value stocks sank in value.

But the Dow Dogs may finally outperform again in 2022. At least they’re off to a good start.

In fact, with investors worrying about inflation and the possibility of rising interest rates recently, value stocks are outperforming growth stocks by a wide margin.

Since Dec. 1, the Invesco S&P 500 Pure Value ETF (RPV) is up 10.5%, compared with its sibling the Invesco S&P 500 Pure Growth ETF (RPG), which is down 7% over the same time frame.

That’s why it may finally be time for the Dow Dogs to shine again this year. Which stocks will make the cut for the Dow dog pound in 2022?


Source: TradeSmith
The Dogs of the Dow composition hasn’t changed much since last year, which makes following this strategy that much easier. There are typically not many changes from year to year.

Only one stock left the group last year: Cisco Systems (CSCO), up 45.8% in 2021. That was enough to reduce CSCO’s dividend yield to 2.3%, so it no longer made the cut for top 10 dividend yields.

In its place, fellow tech giant Intel (INTC), with a 2.7% yield, moved into the pack this year, as shown in the table above.

And using our exclusive TradeSmith Finance tools, you can run your own screen of high-yielding dividend stocks. Plus, this lets you expand your potential buy list beyond the limits of the 30 Dow stocks.

That’s why we created our exclusive Dividend Growers strategy. It helps you find stocks with strong income potential based on the current health of the stock and consistent dividend growth over the past five years.


Source: TradeSmith Finance
Yesterday, I ran a screen for our Dividend Growers strategy using all of the S&P 500 stocks, instead of the Dow 30.

I can show you the three stocks at the top of the list: Whirlpool (WHR), HP (HPQ), and Walgreens Boots (WBA). It wouldn’t be fair to our subscribers to show you all the results, but I can tell you that all the stocks have dividend yields above 2%, and several are in the 3% to 4% range.

Consumer staples and health care stocks are well represented in the list. That’s similar to the list of this year’s Dogs of the Dow. In fact, Walgreens shows up on both lists.

The Dogs of the Dow is a proven strategy for picking blue-chip stocks that may be temporarily out of favor but also offer high dividend yields. And our own Dividend Growers strategy goes a step further by widening the list of potential buy candidates for you to consider.