Dogs of The Dow Investment Strategy: Will it Work?

In 1884, journalist Charles Dow took pen to paper to draft out back-of-the-envelope calculations for a new stock market average. Over time, this Dow Jones Industrial Average (DJIA) emerged as the most iconic stock market benchmark in the world.

Traders, statisticians, and soothsayers have all cultivated their own strategies to profit off the DJIA and its mysteries. The Dogs of the Dow is a simple investment strategy centered around dividend yield. But, will it work?

Identify Dow 30 Components

The Wall Street Journal editorial board compiles the 30 different price-weighted Dow Jones Industrial Average component stocks. The Dow 30 are intentionally selected to mirror the U.S. economy. DJIA performance is strikingly similar to the Standard & Poor’s 500 Index, which is a market-weighted index of 500 large capitalization domestic stocks.

The Dow 30 includes the likes of American Express, Apple, Chevron, Coca-Cola, Goldman Sachs, McDonald’s, Microsoft, Nike, Visa, and Walmart. In 2020, the editorial board replaced Exxon Mobil, Pfizer, and Raytheon Technologies with Amgen, Honeywell, and Salesforce.com.

Sort Dow 30 by Dividend Yields

Dogs of the Dow followers will sort Dow 30 component stocks according to dividend yield. We calculate dividend yield as a percentage, by dividing expected annual dividends by current share price.

Dow stock McDonald’s now pays out a $1.67 quarterly dividend, while trading at $288.47 per share. McDonald’s stock pays out a 2.32% dividend yield ($1.67 x 4 = $6.68 in annual dividends / $288.47 = 0.0232 = 2.32%). From here, we would expect a $100,000 McDonald’s investment to generate $2,320 in dividends in one year.

Dogs of the Dow strategists consider high dividend yield stocks to be cheap. All else being equal, dividend yield percentages will increase amid share price declines. As of January 4, 2024, Verizon (6.81% dividend yield), 3M (5.58%), Dow Chemical (5.17%), Chevron (4.25%), and IBM (4.15%) were the five Dogs of The Dow.

Rebalancing Dogs of The Dow Portfolio

Dogs of the Dow investors will buy different combinations of the five to ten Dow stocks paying out the highest dividend yields. Here, it may be argued that these stocks are cheap relative to both corporate earnings and investment income.

Failure and bankruptcy may be less likely for established Dow 30 firms. Dogs of the Dow practitioners anticipate immediate turnarounds and outperformance to the broader market. Investors may compare Dog returns to both the S&P 500 and Dow 30 overall to assess whether the strategy actually provides value.

The Dogs of The Dow portfolio is to be rebalanced annually. Old Dogs are then to be replaced with the latest Dogs of The Dow. This portfolio rebalancing, of course, will expose traders to capital gains taxes, which subtract away from real returns.

Dogs of The Dow Financial Risks

Mechanical investment strategies that ignore economic fundamentals are always open to controversy. Dividend yields, alone, are not true indicators of value. Unlike bond interest, corporations are not legally obligated to pay dividends.

In 2006, General Motors sported a 10% dividend yield. Shortly thereafter, in 2009, GM eliminated its dividend altogether, declared bankruptcy, and was removed from the Dow Jones Industrial Average.

Onyx Investments Strategy

Onyx Investments does favor investing cash into large American stocks, many of which just happen to be Dow components. We invest according to corporate profitability and are largely indifferent to the mix of share buybacks, dividends, and capital gains that power our total returns.

For Onyx, it is our Exxon Mobil investment that best demonstrates Dow Theory. In March 2020, the Exxon dividend yield spiked to an astounding 11% simultaneously with the stock price crashing to $32 per share. Oil prices actually went negative through the pandemic era due to a lack of storage capacity, and sellers were paying any and all takers to take Black Gold off their hands.

That year, Exxon leveraged its high credit rating to borrow $23 billion to cover $23 billion in losses and maintain its dividend. Exxon was unceremoniously booted off the Dow Jones Industrial Average, while green energy sycophants slapped high fives and celebrated the apparent demise of Big Oil.

Onyx Investments quietly went to work – to back up the truck and load up on Exxon Mobil stock. Last year, in 2023, Exxon was trading at $120 per share, for a four-fold increase in value three short years removed from the bottom of the market.

Easy Money.