Answer: The term Dogs of the Dow refers to an investment approach created by Michael B. O’Higgins in 1991. He believed that purchasing the ten highest yielding dividend paying stocks from the Dow Jones Industrial Average (based on closing prices as of December 31 of the previous year) would lead to superior performance in the upcoming year. The premise is based on the relationship between dividend yield and stock prices; typically if prices go up, yields go down and if prices go down, the yields would be higher. Hence, the name Dogs of the Dow which focuses on the higher yielding, presumable lower performers of the Dow.
In 1896 the Dow Jones Industrial Average (DJIA) was established with only twelve companies. Over time the DJIA grew to thirty companies chosen to represent the overall economy. The names change to reflect economic and technological advancements as well as consumer preferences.
As a start-up company established April 1, 1976 Apple Computer was purely a growth entity with humble beginnings. By 1995 Apple did pay a one-time dividend and in 2012 established regular quarterly dividends. Apple replaced AT&T as a Dow component in 2015.
Here are the current thirty DJIA companies: 3M, Amazon, Apple, Boeing, Caterpillar, Cisco, Chevron, Coca- Cola, Disney, DuPont, Exxon, General Electric, Goldman Sachs, Home Depot, International Business Machines, Intel, Johnson & Johnson, JP Morgan Chase, McDonald’s, Merck, Microsoft, Nike, Pfizer, Procter & Gamble, Travelers, United Technologies, United Health, Verizon, VISA, and Wal-Mart.
When O’Higgins introduced his Dogs of the Dow theory 1991, the internet was not widely used except by government and scientists. Public access to financial research via “The Information Superhighway” hadn’t gone mainstream until the mid-tolate 1990s. At the time, financial advisors were known as stock brokers. Cold-calling was a common way of establishing relationships with potential investors. The Dogs of the Dow was a conversation starter that made sense to many first time investors.
By isolating the dividend yield information on December 31, 2016, the ten Dogs of the Dow were (in order of highest to lowest dividend yield) Verizon, Pfizer, Chevron, Boeing, Cisco, Coca-Cola, IBM, ExxonMobil, Caterpillar, and Merck. The prior year Procter & Gamble and Wal-Mart were on the list but fell off for 2017.
During 2016 Coca-Cola had a worse year than the other two consumer goods based companies. Boeing came on the list not because it was a “dog,” but because it raised its dividend significantly. This made Boeing one of the top ten highest dividend payers making the cut for the list although the stock performed well in 2016.
Mr. O’Higgins back-tested his theory to 1920 in support of his hypothesis. It’s logical that companies with household known names that paid higher dividends because the share price has dropped may provide strong performance.
Historically, dividend paying stocks may decline less than those not offering dividends to shareholders. There’s no guarantee that this approach will help reduce risk, but cash rich companies typically hold value and recover faster than those that do not.
Isolating the ten highest yielding dividend paying stocks from DJIA 30 is just one of many investment approaches. No strategy guarantees success, is appropriate for everyone, or prevents a loss. The bottom line is that the Dogs of the Dow is a relatively straightforward and uncomplicated approach to investing yet just one of many techniques. Does it work all the time? Absolutely not. For instance, during the dot-com boom of 1998-1999, the Dogs didn’t keep pace with the tech companies, and they also failed to keep up during the 2007-2009 financial crisis.
As investors have become more familiar with the Dogs of the Dow it has become less useful. Ultimately, investors may be best served by working with a trusted financial professional to determine their specific goals, identify personal resources and create a unique investment policy strategy to help meet those objectives.
Finally, not to be confused with The Dogs of the Dow, August is known as The Dog Days of Summer as we prepare for Back to School. It’s interesting to note that the Dog Days of Summer refers not only to the hazy, lazy, crazy days of summer, but originally was a term coined by the Greeks and Romans for the days between July 23 and August 22nd, known as the hottest days of the summer. Sirius, the Dog Star astrological constellation appears just before sunrise during these Dog Days. With the solar eclipse occurring Monday, August 21st, this is a good time to look towards the heavens, appreciate the Dog Days of summer while contemplating the Dogs of the Dow. Meanwhile, I’ll use the day as an opportunity to take Lucy and Rickie, our dogs, out for an ice cream cone. Stay focused and invest accordingly.
Past performance does not guarantee future results. All investments are subject to risk. Indices are not available for direct investment. Any investor who attempts to mimic the performance of an index would incur fees and expenses which would reduce returns. This information should not be construed as a recommendation of any investment strategy or product. Views expressed are the current opinion of the author and are subject to change without notice. Information contained in this report was received from sources believed to be reliable, but accuracy is not guaranteed. Information provided is general in nature, and is not a complete statement of all information necessary for making an investment decision. There is no assurance these trends will continue or that forecasts mentioned will occur.
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This article provided by Darcie Guerin, CFP®, Vice President, Investments & Branch Manager of Raymond James & Associates, Inc. Member New York Stock Exchange/SIPC 606 Bald Eagle Dr. Suite 401, Marco Island, FL 34145. She may be reached by phone at 239-389-1041 or email: email@example.com. Website: www.raymondjames.com/Darcie.