Time to check in on some old friends: the Dogs of the Dow.
The “dogs” are just the 10 stocks with the highest dividend yields in the 122-year-old Dow Jones Industrial Average (.DJI), which these days include Verizon (VZ), International Business Machines (IBM) and Pfizer (PFE).
It is an old stock-picking strategy grounded in the idea that you can make more money by buying cheap stocks than you can buying expensive stocks. Sounds simple, but it works.
A high dividend yield is one measure of a stock’s “cheapness.”
Last year, the Dogs of the Dow beat the market. If you bought the 10 highest-yielding stocks in the Dow at the beginning of 2018, then your total return for the year was just over zero. Not great, but better than the Dow overall, which returned minus 3.5%. Zero is also better than the S&P 500 (.SPX) which returned minus 4.4%, including dividends.
What’s more, if you kicked out General Electric (GE) when it was removed from the Dow in June, then your return improved, to 3.5%. GE was unfortunately the worst-performing stock (that started out) in the Dow last year, losing about 55% of its value.
In 2018, the stocks (or the dogs) in this strategy were: Verizon, IBM, Pfizer, Exxon Mobil (XOM), Chevron (CVX), Merck (MRK), Coca-Cola (KO), Cisco Systems (CSCO), Procter & Gamble (PG) and GE.
This year nine of the 10 remain. GE is out and JPMorgan Chase (JPM) is in. That is the only change to the portfolio.
So far this year, the dogs are off to a good start, up 4.9% on average, as of Thursday’s market close. Still, that trails the overall Dow Index, which is up 7.8% year to date. That means there is still time to put new money to work in an old idea.
The beauty of the theory is how straightforward it is. You don’t have to know much to execute it.
Barron’s wrote positive stories on Cisco and Verizon this past year. We also panned General Electric. We did a lot of work to write those pieces—and we still think hard work pays off—but if you adhere to the dogs of the Dow theory, you would have been right there with us, including missing the worst of GE’s 2018 decline.
In a world where things are getting more complex, it is nice to know that simplicity still has some merit.
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