The Dogs of the Dow Strategy: Should Investors Consider It?

As investors consider their strategies for 2025, The Dogs of the Dow strategy could be one of them.

What is a Dogs of the Dow strategy?

It is a popular stock market investment approach that involves selecting the 10 highest-yielding stocks in the Dow Jones Industrial Average at the beginning of each year. In other words stock paying a dividend high enough that it represents a ‘high yield’.

There’s a lot of debate about what ‘high’ constitutes but you could say over 10% in Australia because only a handful of stocks pay this much. A company that priced at $2 a share and pays a 20c per share dividend has a 10% yield. In the US, where buybacks are preferred over dividends and yields over 3% are rare for reasons we’ve delved into elsewhere, this figure could be lower.

The rationale behind this strategy is that these stocks may be undervalued or out of favour, offering potential for price appreciation as well as higher dividend income.

How it Works

At the start of each year, you review the 30 stocks in the Dow Jones, or maybe an indice another exchange like the ASX.

You then invest a roughly equal amount of money in each of these 10 stocks, making sure your portfolio is diversified among them. You should hold these stocks for roughly the whole calendar year, regardless of any short-term market movements. Only at the start of the following year, should you reassess the stocks and perhaps continue to hold or repeat the process, selecting the 10 new highest-yielding stocks.

High dividend yields may suggest you’ll get high dividends at first glance. But in reality, the more important takeaway is that the stock price is temporarily depressed (for example, due to market overreaction), and there could be potential for price recovery. It come with the added bonus of requiring minimal management, as it only involves annual rebalancing.

Plus over the long term, the Dogs of the Dow strategy has often (but not always) outperformed the broader market, although past performance is not always indicative of future results.

It comes with potential drawbacks. Since the strategy only focuses on a handful of stocks in major indice, it will miss out on opportunities in the same indices or outside indices. Perhaps the top performers of last year will continue to outperform.

Maybe stocks that don’t pay dividends or have low yields will more than make up for it with high share price growth. And most importantly, high dividend yields can sometimes signal that a company is struggling, meaning that the stock could continue to underperform.

Example of a “Dogs of the Dow” Portfolio:

Suppose you are considering this strategy at the start of 2025. You would look at a list of highest yielding dividend stocks. Here is a list of the top stocks

• Helia (ASX:HLI)
• Fortescue (ASX:FMG)
• McMillan Shakespeare (ASX:MMS)
• Centuria Office REIT (ASX:COF)
• SG Fleet (ASX:SGF)
• Spark NZ (ASX:SPK)
• Briscoe (ASX:BGP)
• Liberty Financial Group (ASX:LFG)
• Atlas Arteria (ASX:ALX)
• Ampol (ASX:ALD)

These stocks have amongst the highest yields but aren’t the top 10 – we’ve excluded income trusts and Listed Investment Companies, but kept REITs. All of them had yields of over 8% as of January 3, 2025.

Theoretically, you would then invest a roughly equal amount in each of these companies and hold them for the year, rebalancing and reassessing your selections in the next year.

The performance of these from a share price perspective is mixed. On one extreme, SG Fleet (ASX:SGF) is up 46% in a year, the other Spark (ASX:SPK) and Fortescue (ASX:FMG) are down 36% and 45%.

Hypothetically you may get high dividend yields on these stocks. But this does not guarantee they will perform well, or even will pay dividends at all. If goings get tough, they will postpone dividends inevitably.

Now we are not recommending buy all these stocks. We are just illustrating what a potential strategy might look like. And a Dogs of the Dow strategy is just one of many you may consider. But ultimately, as many are talking about this strategy at this time of year, it is worth knowing what it is.

Summary

The Dogs of the Dow strategy is a straightforward approach that focuses on high dividend yield stocks in the Dow Jones Industrial Average. It’s built on the premise that these stocks are temporarily undervalued and may offer both income and price appreciation. While it has been historically effective for certain investors, it does carry risks, particularly the possibility that high dividend yields reflect underlying company problems.

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