Dogs of the Dow
Each year financial news services such as the Wall Street Journal and others like to talk about the strategy known as Dogs of the Dow. This is a popular and established strategy involving buying the 10 stocks with the highest dividend yields of the 30 Dow components at the first of the year and holding them for the next 12 months.
Then, it is rinse and repeat, you simply replace any of the previous 10 highest yielding stocks that have fallen off the wagon with new ones. This strategy has outperformed the Dow Jones and even the S&P 500 many times over the years. However, 2022 was the first time since 2018 that this strategy outperformed the indices. Although, from a value investor’s point of view, this strategy makes sense because it implies high yields based on low valuations (stock prices).
Consequently, rather than just measure whether outperformed or not, as Mr. Valuation I prefer to evaluate why it did or did not outperform. But perhaps even more importantly, even though this strategy implies reasonably valued stocks, I find it more appropriate for investors seeking dividend income.
From the perspective of dividend income versus the indices, the Dogs of the Dow has outperformed based on dividend income most every year including 2018, 2019, 2020, and 2021 where it did not outperform on a total return. In conclusion, although I do not believe in just blindly following this strategy, I have always liked it as a starting point for dividend growth investing.
My reasoning is simple, the Dow Jones 30 stocks are as a group high-quality blue-chip companies. Therefore, they represent fertile ground for dividend growth stock investors that are also concerned with quality. And of course, from a valuation perspective since these 10 stocks are typically a function of low stock prices and high dividend yields, it only makes sense for the value-oriented dividend growth stock investor.
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