The Dogs of the Dow is an investing strategy well-known to retail and institutional investors. The list is published annually by the Dogs of the Dow website. The ten stocks from the Dow 30 that have the highest yield on the last day of the previous year comprise the Dogs of the Dow for the following year. Before diving into the list of the Dogs of the Dow in 2023, let’s first understand the Dow 30.
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A Brief History of the Dow 30
The Dow Jones Industrial Average (DJIA) is also referred to as the Dow 30, and both names are used synonymously. The Dow Jones 30 refers to an index of 30 blue-chip stocks created by Wall Street Journal editor Charles Dow in 1896.
The index was created to track the market performance of leading industrial stocks in an era when the availability of information was limited. Initially, there were 12 industrial companies in the index.
In 1916 the number of stocks in the index was increased to 20. In 1928 the index was again expanded to 30 stocks, and it has been at that number since then. Although the index was initially comprised of industrial stocks, the index later added non-industrial or service stocks. Today, the Technology, Financials, and Healthcare sectors have a significant representation in the Dow 30.
The index is price-weighted, unlike most other indices that are weighted by market capitalization. This fact means that stocks with higher share prices are given greater weight in the index. It is calculated as the sum of the stock prices of all 30 companies divided by a factor known as the Dow Divisor.
The Dow Divisor is adjusted for stock splits, dividends, spin-offs, and additions or deletions to the Dow 30. The Wall Street Journal calculates the Dow Divisor. The Dow Divisor formula attempts to maintain continuity, and it has been as high as 16.67 in 1928 and as low as 0.147 in 2019. The value of the Dow Divisor as of March 7, 2022, is roughly 0.15172752595384, as Barron’s Market Lab reported.
How Are the Dow 30 Selected?
Today, the Dow Jones Industrial Average companies are chosen by a committee. The S&P Dow Jones Indices maintains the index, which is majority-owned by S&P Global (SPGI). The index does not include Transportations and Utilities, which have their own indices. The stock selection criteria are not entirely transparent. Reportedly, to be considered for the Dow 30, a company must meet the following requirements:
- Must be incorporated and headquartered in the United States
- Generate the majority of its revenue from the United States
- Help make the Dow representative of the overall U.S. economy
- Attract a large number of investors
- Demonstrate sustained growth
- Have an excellent reputation
The last time the Dow Jones Industrial Average was changed was in 2020 when ExxonMobil (XOM), Raytheon (RTX), and Pfizer (PFE) were removed, and Salesforce (CRM), Honeywell (HON), and Amgen (AMGN) were added.
Stocks in the Dow 30
The current stocks in the Dow 30 are listed in the table below. This list is up to date as of January 18, 2022. The 2023 Dogs of the Dow are picked from this list at the end of each calendar year.
Currently, three stocks do not pay dividends and thus cannot be included in the Dogs of the Dow. First, Salesforce (CRM) has never paid a dividend. In addition, Disney (DIS) and Boeing (BA) have suspended their dividends because of challenges during the COVID-19 pandemic.
The Dow 30
The 30 stocks in the Dow Jones Industrial Averages (DJIA)
|Ticker||Company||Dividend Yield||Payout Ratio||Price / Earnings||Cap ($M USD)|
|GS||Goldman Sachs Group||2.90%||22.30%||11.6||$118,495|
|JNJ||Johnson & Johnson||2.60%||60.10%||24||$450,632|
|MRK||Merck & Co||2.60%||45.70%||18.3||$280,034|
|PG||Procter & Gamble||2.40%||59.80%||26||$356,497|
|WBA||Walgreens Boots Alliance||5.30%||–||–||$31,334|
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History of the Dogs of the Dow
The concept of investing in the highest-yielding Dow 30 or Dow Jones Industrial Average stocks was reportedly popularized by Michael B. O’Higgins in his book “Beating the Dow,” published in 1991. These stocks are considered “dogs” or not desirable for investors. However, the investing strategy argues that these stocks can have significant gains in stock price plus relatively high dividend yields. This point is because the stock is thought to be temporarily oversold.
The Dogs of the Dow website is primarily dedicated to the investing strategy. The website initially published the Dogs of the Dow list in 1996 and included Philip Morris (MO), Texaco (TX), JP Morgan (JPM), Chevron (CVX), Exxon (XON), Dupont (DD), 3M (MMM), International Paper (IP), General Electric (GE), and Eastman Kodak (EK). In addition, you can review the Dogs of the Dow website for past year lists.
The Dogs of the Dow 2023
The list of the Dogs of the Dow 2023 is given in the table below. The list is based on data from December 31, 2022, when the Dogs of the Dow for 2022 were identified. The average yield at the start of 2023 was 4.51%, which is more than three times the average of the S&P 500 Index.
One interesting point is if you follow this strategy, about 40% of your portfolio would be in tech and communications. So this portfolio is a concentrated one.
Note the Dogs of the Dow 2023 is static for the year, meaning it does not change until 2024
The Dogs of the Dow 2023
The Dogs of the Dow 2023
|Ticker||Company||Dividend Yield||Payout Ratio||Price / Earnings||Cap ($M USD)|
|WBA||Walgreens Boots Alliance||5.3%||–||–||$31,334|
Eight of the ten stocks on this list were on the Dogs of the Dow 2022. The two changes were Merck (MRK) and Coca-Cola (KO) dropped off the list, and Cisco (CSCO) and JPMorgan Chase (JPM) were added to it.
Coca-Cola had a +10.6% total return, and Merck was up 49.4% compared to the (-18.1%) return of the S&P 500 Index. Merck was one of the top-performing Dividend Aristocrats and Dow 30 stocks and thus the yield declined.
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How does the Dogs of the Dow Investing Strategy Work?
According to the Dogs of the Dow website,
“Dogs of the Dow is a stock picking strategy devoted to selecting the highest dividend paying Dow stocks.”
The general idea for the Dogs of the Dow strategy is to make stock picking simple and relatively safe. The Dogs of the Dow focuses on blue-chip stocks paying a dividend. The strategy is also meant to be a long-term strategy requiring less effort than constant trading. Many Dogs of the Dow pay a dividend, and a few are dividend growth stocks, but it is not strictly a dividend growth investing strategy.
The investing strategy requires you to have equally weighted positions in the ten Dogs of the Dow. For example, at the end of the calendar year, an investor should select the ten highest-yielding Dow 30 stocks. Then, they rebalance their portfolio at the beginning of the new year to return to a 10% allocation for each stock. You may also need to sell stocks no longer in the Dogs of the Dow due to changes in the Dow 30 or price appreciation and corresponding declines in dividend yield. Note that equal weighting means that the strategy does not follow the same principle of price weighting as the underlying index.
The Dogs of the Dow strategy assumes blue-chip companies do not change their dividend to reflect the normal business cycle. On the other hand, stock prices reflect the business cycle. Hence, high yields and low stock pricesshould mean that a company is at the bottom of the business cycle, while low yields and high stock prices should mean a company is near the top of the business cycle.
Limitations of Dogs of the Dow
The Dogs of the Dow strategy sounds simple, but it takes some effort, like most things related to portfolio management. Also, it is not an indexing strategy. Like most do-it-yourself (DIY) strategies, there is an active element. That said, the actual trading and rebalancing are limited to a small part of the calendar year. The strategy maximizes yield in a relatively small universe of 30 blue-chip stocks. Hence, your portfolio may not be diversified across sectors. Furthermore, the strategy can lead to a concentrated portfolio in a limited number of sectors, especially if one sector is out of favor, e.g., oil majors during the COVID-19 pandemic.
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Does the Dogs of the Dow Strategy Work?
Investors want to know the answer to the main question: Does the Dogs of the Dow strategy work? The answer seemingly is yes despite the limitations and general criticism of the Dow 30 and Dogs of the Dow.
O’Higgins back-tested the strategy to the 1920s and found that the Dogs of the Dow outperformed the broader market. For instance, between 1992 and 2001, the Dogs of the Dow returned 10.8% average annual total returns matching the Dow 30 and beating the S&P 500 Index, which returned 9.6%.
The Dogs of the Dow website states since 2000, the strategy has had an average total return of ~8.7% when dividends are reinvested. This return is compared to the average annual returns of ~7.9% for the Dow 30 during the same period. In addition, the S&P 500 Index has returned ~7.6% in the same stretch. Notably, this period includes the dot-com bust, the Great Recession caused by the sub-prime mortgage crisis, the bear market during the early stages of the COVID-19 pandemic, and the 2022 bear market.
Another analysis of returns from 2008 to 2018 indicates the strategy generally works. For example, in 2008, the Dogs of the Dow would have underperformed the DJIA. But it would have outperformed the DJIA in eight out of ten years during the period.
Another article indicates the Dogs of the Dow beat the DJIA by more than 1% per year on average in the past decade (through 2019). The Dogs of the Dow only trailed the broader index in three out of 10 years.
However, the Dogs of the Dow strategy underperform for some periods. For example, the annualized return was about 9.2% compared to approximately 16.0% for the S&P 500 Index in the past decade through 2021.
Final Thoughts on Dogs of the Dow 2022
Why does the Dogs of the Dow strategy seemingly work? First, the dividend yields are relatively high, leading to an initial advantage compared to stocks with lower dividend yields. Second, a stock often has a high dividend yield because the price has fallen. This occurs either due to sector or company-specific difficulties. Usually, a stock on the Dogs of the Dow list is undervalued compared to the broader market. It follows a strategy of investing in temporarily undervalued stocks. Ultimately, the Dogs of the Dow is a contrarian strategy.
Prior Year Dogs of the Dow
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Prakash Kolli is the founder of the Dividend Power site. He is a self-taught investor, analyst, and writer on dividend growth stocks and financial independence. His writings can be found on Seeking Alpha, InvestorPlace, Business Insider, Nasdaq, TalkMarkets, ValueWalk, The Money Show, Forbes, Yahoo Finance, and leading financial sites. In addition, he is part of the Portfolio Insight and Sure Dividend teams. He was recently in the top 1.0% and 100 (73 out of over 13,450) financial bloggers, as tracked by TipRanks (an independent analyst tracking site) for his articles on Seeking Alpha.