In the mid-1990s, a strategy called “Dogs of the Dow” became popular. Its popularity briefly waned in the late 1990s, as growth investing was all the rage. Once the internet bubble burst, however, the strategy performance improved and long-term investors benefited.
The Dogs strategy is based on the concept that investors should own well-established companies with attractive yields. The strategy is simple: At the start of every year rank the Dow stocks based on their yield. The 10 with the highest yields are purchased and held until year-end, at which time the process is repeated.
Dividends are the key component because yield matters. Over the last 10 years, the S&P 500 index is up 80 percent. With dividends, however, the index is up 121 percent!
In 2017, the Dogs of the Dow strategy lagged, returning 19 percent compared with the 25 percent return from the blue-chip average. That said — the strategy has outperformed in six of the last eight years. Since 2000, the annual return for the Dogs of the Dow was 8.6 percent compared with 6.9 percent for the Dow.
In descending order of dividend yield, the 2018 Dogs of the Dow are as follows: Verizon (VZ), International Business Machines (IBM), Pfizer (PFE), ExxonMobil (XOM), Chevron (CVX), Merck (MRK), Coca-Cola (KO), Cisco Systems (CSCO), Procter & Gamble (PG), and General Electric (GE).
The Dogs of the Dow strategy limits holdings to Dow stocks because they are all well established and are unlikely to cut their dividends. Of the 2018 Dogs, my favorites are Verizon and Pfizer. These are long-term positions in many of my client accounts. I’d skip owning General Electric, however, which will probably be dropped from the Dow.
There isn’t a Dogs of the Dow ETF, but the ALPS Sector Dividend Dogs ETF (SDOG) applies a similar strategy. It buys the five highest-yielding stocks in each of the Standard & Poor’s sectors. Whether you buy this ETF or the individual stock issues, owning dividend-paying stocks pays off over the long haul.
David Vomund is an Incline Village-based fee-only money manager. Information is found at http://www.VomundInvestments.com or by calling 775-832-8555. Clients hold the positions mentioned in this article. Past performance does not guarantee future results. Consult your financial advisor before purchasing any security.