A New Dow Stock-Picking Strategy That Outperforms Dogs Of The Dow

Includes: AXP, BA, CSCO, DIA, IBM, MCD
by: Brad Kenagy

Over the last couple of weeks I have been reading articles about the Dogs of the Dow Strategy, and I thought to myself, "Is there a better strategy out there?" The Dogs of the Dow strategy entails buying the 10 highest yielding stocks of the Dow at the beginning of the calendar year. So for a challenge, I would try to create my own Dow stock picking strategy, which was repeatable year after year, and could compete with the Dow Jones Industrial Average and the Dogs of the Dow.

For my strategy I chose to use a main criteria of dividend growth and stability for all 30 stocks of the Dow. Then as a secondary set of criteria to further refine that list, I used two simple technical indicators, a moving average and momentum. My method is different because it employs both fundamentals and technicals, compared to instead of just using the dividend yield like the Dogs of the Dow, or owning the whole Dow Jones Industrial Average in an ETF, like the SPDR Dow Jones Industrial Average (NYSEARCA:DIA).

I wanted to make the strategy as simple as possible so it could be easy to follow, and easy to repeat and test. The technical data I got from TD Ameritrade's Strategy Desk, but also can be found many other charting websites' company profiles; PE and dividend yield are from Yahoo Finance. The following are my criteria and indicators used in my strategy:

Dividend Stability and Growth Criteria

To get my initial list of Dow stocks for each calendar year, I only included stocks that had a stable and/or growing dividends over the previous 4 quarters from the end of each year. I used Yahoo Finance to retrieve the historical dividend amounts for all 30 Dow components, as well as the Dow components that have left the Dow in the last 5 years.

Technical Criteria

  1. The chart scale I used was weekly.
  2. All positions are an equal weight of the portfolio.
  3. Condition 1: The weekly close at the end of the year is less than the 10 period simple moving average.
  4. Condition 2: The stock must have a 52 period momentum value that is positive.
  5. Condition 3: Out of the stocks that meet the first two conditions, select the stocks with the three highest 52 period momentum values.
  6. In the case where not at least three stocks that meet both condition 1 and condition 2, as was the case for the 2009 selection and for this year, use condition 1 and condition 3, and exclude condition 2.

5-Year Results

In the following table are the average returns of the stocks selected by the strategy for the last 5 years compared to the Dow Jones Industrial Average ETF and the average total return for the Dogs of the Dow stocks. For my calculations I wanted to make sure dividends were included and reinvested, so I used the DRIP returns calculator on DividendChannel.com to get my final total return.


5 stocks met the above criteria, and the three with the largest momentum on December 31, 2010 were:

McDonald's Corp. (NYSE:MCD), Boeing Co. (NYSE:BA), American Express Company (NYSE:AXP).


2011 Return

My Strategy




Dog's of Dow



5 stocks met the above criteria, and the three with the largest momentum on December 31, 2009 were:

Caterpillar Inc. (NYSE:CAT),Bank of America (NYSE:BAC),The Travelers Companies, Inc. (NYSE:TRV).


2010 Return

My Strategy




Dog's of Dow



6 stocks met the above criteria, and the three with the largest momentum on December 31, 2008 were:

E.I. du Pont de Nemours and Co (NYSE:DD), JPMorgan Chase & Co., Kraft Foods Inc. (KFT).


2009 Return

My Strategy




Dog's of Dow



15 stocks met the above criteria, and the three with the largest momentum on December 31, 2007 were:

Honeywell International Inc. (NYSE:HON), Coca-Cola (NYSE:KO), McDonald's.


2008 Return

My Strategy




Dog's of Dow



6 stocks met the above criteria, and the three with the largest momentum on December 31, 2006 were:

Exxon Mobil Corporation Common (NYSE:XOM), AT&T Inc. (NYSE:T), United Technologies (NYSE:UTX).


2007 Return

My Strategy




Dog's of Dow



All 5 years that I looked at my Dow stock picking strategy outperformed both the Dow as a whole, and the Dogs of the Dow strategy. My strategy outperformed the Dow by an average of 11.43% per year, and outperformed the Dogs of the Dow by an average of 11.14% each year. I believe the outperformance comes from my selection process of picking stocks that have stable dividends and or growing dividends, and excluding those stocks that have cut their dividends. The outperformance is also helped by the Dow stocks that were under their 10 week simple moving average, but still having a positive momentum. That shows that even though the stock is below its moving average the long term trend is still positive.

2012 Strategy Picks

So for the upcoming year, 7 stocks met the above criteria, and the three with the largest momentum on December 31, 2011 were:

International Business Machines (NYSE:IBM)

International Business Machines Corporation provides information technology (NYSE:IT) products and services worldwide. IBM has a PE of 14.14 and a dividend yield of 1.60%.

American Express Company

American Express Company, together with its subsidiaries, provides charge and credit payment card products, and travel-related services worldwide. American Express has a PE of 12.32 and a dividend yield of 1.50%.

Cisco Systems, Inc. (NASDAQ:CSCO)

Cisco Systems, Inc. designs, manufactures, and sells Internet protocol-based networking and other products related to the communications and information technology industry worldwide. Cisco has a PE of 16.52 and a dividend yield of 1.30%.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Disclaimer: This commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities.

The strategies discussed are strictly for illustrative and educational purposes and should not be construed as a recommendation to purchase or sell, or an offer to sell or a solicitation of an offer to buy any security. There is no guarantee that any strategies discussed will be effective. The information provided is not intended to be a complete analysis of every material fact respecting any strategy. The examples presented do not take into consideration commissions, tax implications or other transactions costs, which may significantly affect the economic consequences of a given strategy.

This material represents an assessment of the market environment at a specific time and is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding the funds or any security in particular.