Dogs Of The Dow: A Look At The Results For 2012

by: David Crosetti


In the last couple of days, there have been a number of articles that have addressed the investment strategy known as "The Dogs of the Dow." Now, in and of itself, the strategy is pretty straightforward and not very complicated.

In a nutshell, an investor should rank the stocks in the Dow 30 by dividend yield. The investor should purchase the top 10 yielding stocks on December 31st of the current year (or as close as you can get) and hold them until the following December 31st, when the investor will sell the holdings that he has and repeat the process with the newest top yielding stocks of the Dow.

Now there are multiple variances of this investment strategy. But, again, in its simplest form, the Dogs of the Dow as explained above will be our reference point as we move forward. How well does this strategy work? Well, that depends on how you choose to measure it. One of the best sites for Dog investors can be found here.

In a chart at this site, we can look at the performance of the Dogs compared to other indexes:

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What You Should Know:

I have been investing in the Dogs of the Dow since 2009. It is something that I like to fool around with and normally, I will invest $1000 in each of the 10 stocks. I do not reinvest the dividends, but instead collect them as cash, which I will keep as allocations to the Dog portfolio.

Every year, I purchase the 10 Dogs and hold them for 12 months until the following December 31st. Now, if any stock is a repeat for the new Dog period, what I will do is hold that position, but sell any gain to get it back to $1000 in value. Any company that falls off the Dogs list will be sold, and the money from rebalancing and from any sales is what I use to fund the new portfolio for the new year.

The cash balances from dividends can also be used to fund the $1000 entry positions, or that money can go to purchasing other DG stocks in another portfolio.

Well, How Did We Do?

Well, the Dogs of the Dow did not "light things up" this year. I will share a couple of charts with you for review. Our first chart shows the gain or loss of each position, starting on 12/31/11 and ending on 12/31/12.

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Our portfolio gained 5.4% without reinvestment or the inclusion of dividends.

Why Dividends Matter:

The next table shows the dividends paid each quarter for each of our 10 positions. A total of $422.63 was paid in dividends by the stocks that made up our portfolio for the year 2011.

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When we add the dividends paid to the ending value of our stock positions, we enhance the overall value of the portfolio, significantly. With the dividends we received, the portfolio performed much better than if we did not receive any dividends. The added value from the dividends paid increased the overall performance of the portfolio to a growth rate of 9.48% for the year ending 12/31/12.

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Conclusion and Summary:

In my opinion, the Dogs of the Dow is a dividend growth strategy. Without the impact of dividends, the strategy is at best a random one. What makes it fun and interesting is the fact that these companies are the highest paying dividend stocks in a particular index.

In the low return world that we live in today, I think a 9.48% return for 12 months is absolutely fantastic. Could that growth rate been beaten? Sure, it could have. But here's what would have been required.

First, you would have to have an element of timing in a different strategy. With the Dogs, the underlying price of the stock is of less importance. What the Dogs strategy hinges on is the thought process of the dividend, relative to the price. The higher the dividend, the thinking is, the more the company's underlying price has been impacted and thus, the stocks represent a "value."

Now, before you get your feathers all ruffled, I don't necessarily buy into that notion.

Second, another strategy requires that you become a stock picker. There is no picking here. Just the 10 highest yielding stocks in the index.

Should you base your entire investment strategy on The Dogs of the Dow? That is an individual decision. I won't recommend that you do that, but I will recommend that you consider it. After all, many of these companies are good ones, and stocks that would enhance every portfolio.

Disclosure: I am long T, GE, VZ, PFE, DD, MRK, JNJ, PG, INTC, MDLZ. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.