Dogs of the Dow: Meaning, How It Works & Examples

By Colin Dodds · October 08, 2023 · 6 minute read

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Dogs of the Dow: Meaning, How It Works & Examples

What Are the Dogs of the Dow?

The “Dogs of the Dow” is an investment strategy that focuses on large, established companies that offer relatively high dividends. There are different ways to pursue the strategy, but it generally attempts to outperform the Dow Jones Industrial Average (DJIA) by investing in the highest dividend-yielding stocks from among the 30 stocks that comprise the DJIA.

The Dow Jones is among the oldest and most popular stock indices in the world, with casual investors often using it as a shorthand for the performance of the broader stock market, and even the global economy. Over time, the Dogs of the Dow tends to perform in line with it.

The Dogs of the Dow strategy became popular in 1991 with the publication of Beating the Dow in which author Michael B. O’Higgins coined the term “Dogs of the Dow.” The strategy itself reflects the assumption – usually true – that blue-chip companies have the stability to continue to pay out their regular dividends regardless of the performance of their stocks.

How the Dogs of the Dow Work

The formula for identifying the companies in the Dogs of the Dow is – by the standards of economics – fairly simple. It comes down to the stock’s dividend yield, calculated by dividing the annual dividend paid by a stock (in dollars) by its stock price. The stocks with the highest dividend yields are the Dogs of the Dow.

Followers of the Dogs of the Dow strategy believe the dividend paid by a company more accurately reflects its average value than the trading price of that company’s stock. Unlike the dividend, the stock price is always in flux.

When the stock prices of companies go down in response to the business cycle, the ratio of those companies’ dividends to their stock prices will go up. In other words, the dividends of those stocks will be disproportionately high in relation to their stock prices. Adherents of the Dogs of the Dow strategy believe the companies with that high dividend-to-stock-price ratio will eventually revert to their mean and should grow faster when the business cycle turns, and their prices increase. In addition to promising performance, the strategy also offers investors regular income in the form of dividend payments.

💡 Quick Tip: Before opening any investment account, consider what level of risk you are comfortable with. If you’re not sure, start with more conservative investments, and then adjust your portfolio as you learn more.

Who Are the Dogs of the Dow in 2023?

The 2023 Dogs of the Dow are led by Verizon with a dividend yield of 6.62%, followed by Dow with a dividend yield of 5.56%. The others are: Intel (5.52%), Walgreens (5.14%), 3M (4.97%), IBM (4.68%), Amgen (3.24%), Cisco (3.19%), Chevron (3.16%), and JP Morgan Chase (2.98%).

The Dogs are always changing, as are the companies that make up the DJIA itself. In 2020, for example, joined the index – a rare entrant that has never paid its investors a dividend. In the same year, troubled aerospace titan and DJIA member Boeing suspended its dividend.

Between 2022 and 2023, Cisco and JP Morgan Chase joined the list, and Merck and Coca-Cola left the list because their dividend yields dropped.

It’s easy to see that the highest-yielding stocks in the DJIA are always changing. This means that an investor who is pursuing this strategy needs to regularly rebalance their holdings, whether monthly, quarterly or annually.

One reason such rebalancing is necessary is that even though the large stocks in the DJIA typically have lower volatility than some other stocks, their values still change over time. So rebalancing is an important step toward preventing a situation where one stock plays too big of a role in a portfolio’s performance. But with a Dogs of the Dow strategy, rebalancing is even more important, as the companies that fit the description will change on a semi-regular basis.

Investing in the Dogs of the Dow

Different investors view the Dogs of the Dow differently. Some say it’s only the five or 10 DJIA stocks with the highest dividend-to-share-price relationship. But it’s worth noting that not all 30 companies on the DJIA index currently pay dividends.

Investors can buy 10, 15 or all 30 of those stocks through a brokerage account. Or they can invest in the DJIA by purchasing exchange-traded funds (ETFs). There are even Dogs of the Dow ETFs that invest in the dividend-focused strategies similar to Dogs of the Dow approach. But when buying one of these funds, it is important to read their strategies before investing.

Recommended: What Are Dividend ETFs?

Pros and Cons of Dogs of the Dow Strategy

There are several advantages to using a Dogs of the Dow strategy, but there are also some drawbacks for investors to consider.

Dogs of the Dow: Pros

• The strategy invests in Blue Chip companies with a long history of success and industry-leading positions.

• It has a history of outperforming the DJIA.

• Investors receive regular dividend payments.

Dogs of the Dow: Cons

• The IRS taxes dividends paid by the stocks at the income-tax rate rather than the lower capital gains rate.

• It is a value-oriented strategy that may lag during growth markets.

• The strategy isn’t widely diversified.

💡 Quick Tip: When you’re actively investing in stocks, it’s important to ask what types of fees you might have to pay. For example, brokers may charge a flat fee for trading stocks, or require some commission for every trade. Taking the time to manage investment costs can be beneficial over the long term.

Does Dogs of the Dow Still Work?

The Dogs of the Dow struggled during the market upheaval of 2020. As a group of 10, the Dogs lost 13% over the course of the year, well below the 7% increase posted by the DJIA. In 2021, the Dogs were also below the DJIA and the S&P 500. And 2021 was the third straight year the Dogs didn’t do as well as the broader Dow.

However, in 2022, Dogs of the Dow did better than the DIJA with a positive return of 2.2%, while the DJIA had a negative return of -7.0.

Historically, Dogs of the Dow has occasionally done worse than the broader DJIA, notably in the financial crisis of 2008, when it suffered larger losses than the index. But through the 10 years that followed, it outperformed the Dow, though not profoundly.

But even small amounts of outperformance add up over time. A $10,000 investment in the DJIA made at the outset of 2008 would have grown to approximately $17,350 by the end of 2018. The same amount invested in the Dogs of the Dow strategy would have reached $21,420 by the end of 2018, assuming that the investor rebalanced their holdings once per year.

Recommended: What Is the Average Stock Market Return?

The Takeaway

Dogs of the Dow is an investment strategy that uses dividends as a way to spot undervalued Blue Chip stocks, and to benefit from economic cycles.

While investors may be interested in exploring the Dogs of the Dow, the strategy does have pros and cons. Investors should weigh the benefits and drawbacks carefully before using it.

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Photo credit: iStock/Helin Loik-Tomson

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