All The Dogs!

by: FerdiS

The Dogs of the Dow is a strategy targeting the ten top-yielding Dow for investment each year.

I don't actively follow the Dogs of the Dow strategy, but I happen to own all the Dogs in my DivGro Portfolio.

This article discusses the strategy and presents fair value estimates of all the Dogs, plus two additional stocks than now are in the 10 highest yielding Dow stocks.

Dogs of the Dow is an investment strategy that targets the ten top-yielding stocks in the Dow Jones Industrial Average (DJIA) for investment each year. Popularized by Michael B. O'Higgins in his 1991 book, Beating the Dow, this simple strategy frequently outperforms the DJIA and seems to outperform the index over longer periods of time.

The strategy is based on the idea that blue-chip companies pay consistent (and increasing) dividends, while their stock prices fluctuate based on market conditions. So, if the dividend yield is higher than usual, the stock price likely is lower than usual. Investors following this strategy should reap the benefits of higher yields and above-average stock-price gains.

I don't actively follow the Dogs of the Dow strategy, but I happen to own all the dogs in my DivGro Portfolio.

The Dow Stocks

Dow refers to the Dow Jones Industrial Average, a stock market index created by Charles Dow and named after Dow and one of his business associates, statistician Edward Jones. The index indicates the value of thirty large, publicly owned companies based in the United States.

The value of the Dow is the sum of the price of one share of stock for each component company, corrected by a factor that is adjusted whenever one of the component stocks split or pays a dividend.

The price-weighted approach of determining the index is problematic, as evidenced this week by the significant impact of just one stock's woes on the index. Boeing (BA) shares closed at $422.60 per share last Friday, March 8, before concerns over the second Boeing 737 crash within five months last Sunday caused the stock to tumble to below $380. For reference, the next highest per share price of a Dow stock is UnitedHealth Group (UNH), which is trading near $250.

Despite these issues, the index remains popular and it provides a snapshot of some of the most influential businesses in the world.

As mentioned earlier, the Dogs of the Dow strategy looks to invest in the top-yielding Dow stocks. To identify the 2019 Dogs of the Dow, let's look at a dividend yield chart of the Dow's component stocks, as of 1 January 2019:

In the chart, the ten Dow stocks with the highest yields on 1 January 2019 are colored green.

The 2019 Dogs of the Dow

Below is a table of the 2019 Dogs of the Dow. The table shows the dividend yields of these stocks on 1 January 2019 (qualifying yield) as well as the year to date (YTD) performance and the current yield of each stock.

Year to date, the Dow is up 9.55% and the S&P 500 is up 11.36%.

In comparison, an equal-weighted portfolio of this year's Dogs of the Dow is up 9.00%, slightly lagging the performance of both the Dow and the S&P 500. The main culprits are Pfizer (PFE) and Coca-Cola (KO), though several other Dogs are lagging the market, too, including Verizon (VZ), JPMorgan Chase (JPM), Procter & Gamble (PG), and Merck (MRK).

On the other hand, International Business Machines (IBM), ExxonMobil (XOM), Chevron (CVX), and Cisco Systems (CSCO) easily are outperforming the markets year to date.

It would be interesting to see how these stocks perform during the remaining months of 2019.

The Dogs of the Dow have not outperformed the Dow or the S&P 500 consistently, as can be seen in the following table, courtesy of Money-Zine:

In the table, cells with the best performance each year are colored green.

Over the period covered in the table, the Dogs averaged 6.63%, The Dow averaged 6.54%, and the S&P 500 averaged 5.95%. So, indeed, the Dogs seem to do slightly better than the Dow (and the S&P 500, for that matter) over longer periods of time.

The run-up in the stock prices of IBM (IBM), Cisco Systems (CSCO), ExxonMobil (XOM), and other stocks, have changed their yields significantly. If we selected the Dogs of the Dow today, the picture would be a little different:

Notice that CSCO and Merck (MRK) both dropped out of the top ten yielding stocks. And entering the top ten are Walgreens Boots Alliance (WBA) and Home Depot (HD). WBA's stock price declined recently, while HD announced a 32% dividend increase.


I mentioned earlier that I don't actively follow the Dogs of the Dow strategy, but that I happen to own all the dogs in my portfolio. In fact, I own 23 of the Dow stocks. After all, most Dow stocks are dividend growth stocks of large, well-established and financially sound companies that have operated for decades.

The seven Dow stocks that are not in my portfolio and my reasons for not owning them are:

  • DowDuPont (DWDP) - not an established dividend growth stock
  • United Technologies (UTX) - plans to split into three companies
  • Caterpillar (CAT) - owned previously, but sold due to cyclicality concerns
  • Walmart (WMT) - owned previously, but sold due to anemic dividend growth
  • Goldman Sachs (GS) - tarnished reputation during the financial crisis
  • American Express (AXP) - poor recession performance and debt level concerns
  • Nike (NKE) - owned previously, but sold to capture 38% profits and due to low yield

For investors interested in owning the 2019 Dogs of the Dow, below is a table with several fair value estimates and price targets, a collated fair value estimate, and an indication of price discount or premium. I'm including the two stocks that now are in the top ten yielding Dow stocks, WMT and HD. To determine the collated fair value, I ignore the lowest and highest estimates and targets, and average the median and the mean of the remaining values:

Here is a summary of the sources of fair values and target prices used:

  • - fair value estimate based on several financial models
  • Morningstar - fair value estimate based on discounted cash flow analysis
  • Simply Safe Dividends (SSD) - derived fair value comparing current yield to 5-year average yield
  • Simply Wall St - future cash flow value using 2-stage discounted cash flow analysis
  • TipRanks - average of analyst price targets
  • Value Line - average of target range
  • Yahoo! Finance - average of analyst price targets
  • CFRA - fair value calculation based on CFRA's proprietary quantitative model

Several 2019 Dogs are trading below fair value, with IBM and CVX trading at a discount of at least 10%. Also, KO and VZ are trading at a discount of just less than 10%. Notice, though, that WBA is trading nearly 19% below fair value.

Concluding Remarks

Although I don't actively follow the Dogs of the Dow strategy, I happen to own all ten Dogs and another thirteen Dow stocks. These are quality dividend growth stocks of large, well-established and financially sound companies.

Two stocks, WBA and HD, now have yields that put them in the top ten yielding Dow stocks, replacing CSCO and MRK. In this article, I provided fair value estimates for the Dogs and these two stocks. Several stocks are trading below fair value, providing investors an opportunity to lock in higher yields and the potential of above-average stock-price gains.

Thanks for reading and take care, everybody!

Note: This article first appeared on TalkMarkets on Thursday, March 14, 2019.

Disclosure: I am/we are long IBM, XOM, VZ, CVX, PFE, KO, JPM, PG, CSCO, MRK, HD. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I am not a financial professional. Please consult an investment advisor and do your own due diligence prior to investing. Investing involves risk. Ideas presented in this article are the opinions of the author and should not be taken as investment advice. Please see my DivGro portfolio for all my holdings.