The Dogs of the Dow is an investing strategy that is by now fairly well-known to many small investors. The list is published annually by the Dogs of the Dow website. The 10 stocks from the Dow 30 that have the highest yield on the last day of the year comprise the Dogs for the Dow for the following year. Before we dive into the list of the Dogs of the Dow in 2021 lets first look at some history of the Dow 30 and the Dogs of the Dow.
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History of the Dow 30
First some history on the Dow Jones Industrial Average, which is also referred to as the Dow 30 before we discuss why it is changing. The Dow Jones 30 refers to an index of 30 blue-chip stocks that was created by Wall Street Journal editor Charles Dow in 1896. It is the second oldest index after the Dow Jones Transportation Average. The name is derived from Charles Dow and his business partner Edward Jones.
The index was created to track the market performance of leading industrial stocks in an era when information flow was limited. Initially, there were 12 industrial companies in the index. These were the largest industrial companies at the time and included companies in sugar, tobacco, oil, and rubber industries. The 12 companies in the original Dow Jones Industrial Averages were American Cotton Oil, American Tobacco, American Sugar, Chicago Gas, Distilling & Cattle Feeding, General Electric, Laclede Gas, National Lead, North American, Tennessee Coal & Iron, U.S. Leather, and U.S Rubber.
In 1916 the number of stocks in the index was increased to 20. In 1928 the index was expanded to 30 stocks, which is the number today. Although the index was initially comprised of industrial stocks, the index later added non-industrial or service stocks. In fact, today, technology, financial services, and healthcare sectors have a large representation in the Dow 30.
The index is price weighted, which is unlike most other indices that are weighted by market capitalization. This means that stocks with higher share prices are given greater weight in the index. It is calculated as the sum of the prices of all 30 companies divided by a factor. The factor, which is referred to as the Dow Divisor is adjusted for stock splits, dividends, spin offs, and additions or deletion to the Dow 30. The Dow Divisor is calculated by The Wall Street Journal. The Dow Divisor formula attempts to maintain continuity in the index value after changes. The current value of the Dow Divisor is roughly 0.147.
Today, the Dow Jones Industrial Average is chosen by committee. The index is maintained by the S&P Dow Jones Indices, which is majority owned by S&P Global. The index does not include transportation and utilities, which have their own indices. The stock selection criteria are not complete transparent. Reportedly, to be considered for the Dow 30, a company must meet the following criteria:
- Be in the S&P 500 Index
- Must be incorporated and headquartered in the U.S.
- Generate the majority of its revenue from the U.S.
- Help make the Dow representative of the overall U.S. economy
- Attract a large number of investors
- Demonstrate sustained growth
- Have an excellent reputation
That said, stocks can be removed from the Dow 30 and later reinstated. For example, Chevron (CVX) was in the Dow 30 from 1930 to 1999 when it was removed. The stock was added back in 2008. Similarly, Honeywell (HON) was removed in 2008 and added back in 2020. You can look at the list of addition and deletions in the Dow 30 since 1929. There is no set time period for additions or deletions. Changes are made as needed. The Dow Jones 30 was last changed on August 31, 2020 when Exxon Mobil (XOM), Pfizer (PFE), and Raytheon Technologies (RTX) were removed and Salesforce (CRM), Honeywell International (HON), and Amgen (AMGN) were added.
Stocks in the Dow 30
The current stocks in the Dow 30 are listed below. This list is up to date as of January 6, 2021. Note that Salesforce (CRM) does not pay a dividend. Both Disney (DIS) and Boeing (BA) have suspended their dividends. You can check the coronavirus dividend cuts and suspensions list. Overall the Dow Jones 30 had a reasonably good year in 2020 and crossed over 30,000 hitting an all-time high.
|Name||Ticker||Market Capitalization (millions)||P/E Ratio||Dividend Yield|
|APPLE INC.||AAPL||$ 2,227,406||40.10||0.63%|
|AMGEN INC.||AMGN||$ 132,595||18.37||3.09%|
|AMERICAN EXPRESS COMPANY||AXP||$ 95,553||29.32||1.45%|
|THE BOEING COMPANY||BA||$ 119,471||0.00||0.00%|
|CATERPILLAR INC.||CAT||$ 99,764||30.53||2.24%|
|SALESFORCE.COM, INC.||CRM||$ 202,691||57.77||0.00%|
|CISCO SYSTEMS, INC.||CSCO||$ 185,838||17.86||3.27%|
|CHEVRON CORPORATION||CVX||$ 167,479||0.00||5.93%|
|THE WALT DISNEY COMPANY||DIS||$ 323,063||0.00||0.00%|
|Dow Inc.||DOW||$ 41,390||0.00||5.02%|
|THE GOLDMAN SACHS GROUP, INC.||GS||$ 93,218||15.63||1.85%|
|THE HOME DEPOT, INC.||HD||$ 286,430||22.99||2.26%|
|HONEYWELL INTERNATIONAL INC.||HON||$ 146,273||30.98||1.78%|
|INTERNATIONAL BUSINESS MACHINES CORPORATION||IBM||$ 112,398||14.07||5.17%|
|INTEL CORPORATION||INTC||$ 207,400||9.92||2.61%|
|JOHNSON & JOHNSON||JNJ||$ 416,837||25.34||2.55%|
|JPMORGAN CHASE & CO.||JPM||$ 383,007||16.41||2.87%|
|THE COCA-COLA COMPANY||KO||$ 224,240||27.06||3.14%|
|MCDONALD’S CORPORATION||MCD||$ 157,576||32.28||2.44%|
|3M COMPANY||MMM||$ 98,971||20.11||3.43%|
|MERCK & CO., INC.||MRK||$ 205,186||17.84||3.21%|
|MICROSOFT CORPORATION||MSFT||$ 1,647,432||35.15||1.03%|
|NIKE, INC.||NKE||$ 221,707||80.63||0.78%|
|THE PROCTER & GAMBLE COMPANY||PG||$ 342,513||26.52||2.28%|
|The Travelers Companies, Inc.||TRV||$ 34,078||15.40||2.53%|
|UNITEDHEALTH GROUP INCORPORATED||UNH||$ 327,153||19.81||1.45%|
|VISA INC.||V||$ 501,369||47.20||0.60%|
|VERIZON COMMUNICATIONS INC.||VZ||$ 242,410||13.25||4.28%|
|WALGREENS BOOTS ALLIANCE, INC.||WBA||$ 35,558||83.31||4.54%|
|WALMART INC.||WMT||$ 412,368||21.04||1.48%|
Source:MS Excel Look-Up, Portfolio Insight (as of January 6, 2021)
Other Dividend Stock Lists
I have also written articles with several other lists and analyses on U.S. dividend growth stocks including:
- List of Dividend Kings in 2021
- List of Dividend Aristocrats in 2021
- List of Dividend Champions in 2021
- List of Dividend Contenders in 2021
- List of Dividend Challengers in 2021
For Canadian stocks, I have written about
For UK stocks, I have written about
Other dividend stock lists
History of the Dogs of the Dow
The concept of investing in the highest yielding Dow 30 or Dow Jones Industrial Average stocks was reportedly popularized by Michael B. O’Higgins in his book “Beating the Dow” published in 1991. These stocks are considered to be “dogs” or not desirable for investors. However, the investing strategy argues that these stocks have the potential for significant gains in stock price plus relatively high dividend yields. This is because the stock is thought to be oversold.
There is a website, Dogs of the Dow, largely dedicated to the investing strategy. The website originally published the Dogs of the Dow list in 1996 and included Philip Morris (MO), Texaco (TX), JP Morgan (JPM), Chevron (CVX), Exxon (XON), Dupont (DD), 3M (MMM), International Paper (IP), General Electric (GE), and Eastman Kodak (EK). You can take a look at the Dogs of the Dow website for other years between then and the current list of Dogs of the Dow in 2021.
How does the Dogs of the Dow Investing Strategy Work?
According to the Dogs of the Dow website”
“Dogs of the Dow is a stock picking strategy devoted to selecting the highest dividend paying Dow stocks.”
The general idea for the Dogs of the Dow strategy is to make the stock picking simple and relatively safe. This is because the Dogs of the Dow focuses on blue-chip stocks that pay a dividend. The strategy is also meant to be a long-term strategy that requires less effort than constant trading. Many Dogs of the Dow pay a dividend, and a few are dividend growth stocks, but it is not strictly a dividend growth investing strategy.
The investing strategy requires you to have equally weighted positions in the ten Dogs of the Dow. At the end of calendar year, you are supposed to select the 10 highest yielding Dow 30 stocks. Then, at the beginning of the new year, you rebalance your portfolio to bring it back to a 10% allocation for each stock. You may also need to sell stocks that are no longer in the Dogs of the Dow due to changes in the Dow 30 or price appreciation and corresponding changes in dividend yield. Note that the equal weighting means that the strategy does not follow the same principle of price weighting as the underlying index.
The Dogs of the Dow strategy is based on the assumption that blue-chip companies do not change their dividend to reflect the normal business cycle. On the other hand, stock prices reflect the business cycle. Hence, high yields and low stock prices should mean that a company is at the bottom the business cycle while low yields and high stock prices should mean that a company is near the top of the business cycle.
Limitations of Dogs of the Dow
The Dogs of the Dow strategy sounds simple, but like most things related to portfolio management it takes some effort. It is not an indexing strategy. Like most do-it-yourself or DIY strategies there is an active element. That said, the actual trading and rebalancing is limited to a small part of the calendar year. The strategy maximizes yield in a relatively small universe of 30 blue-chip stocks. Hence, your portfolio may not be diversified across sectors. Further, the strategy can lead to a concentrated portfolio in a limited number of sectors especially if one sector is out of favor, e.g. oil majors during the COVID-19 pandemic.
Dogs of the Dow in 2021
Now, let’s list the current stocks Dogs of the Dow in 2021. The list below based on data at end of December 31, 2020, which is when the Dogs of the Dow for 2021 were identified. The current average yield is 4.08%.
Note the Dogs of the Dow in 2021 is static for the year meaning that it does not change until 2021.
|Company||Ticker||Yield||Price||52-Week Low||52-Week High|
|AMGEN INC.||AMGN||3.11%||$ 226.51||$ 177.05||$ 264.97|
|CISCO SYSTEMS, INC.||CSCO||3.27%||$ 43.99||$ 32.40||$ 50.28|
|CHEVRON CORPORATION||CVX||5.86%||$ 88.07||$ 51.60||$ 121.67|
|Dow Inc.||DOW||4.88%||$ 57.36||$ 21.95||$ 58.18|
|INTERNATIONAL BUSINESS MACHINES CORPORATION||IBM||5.10%||$ 127.78||$ 90.56||$ 158.75|
|THE COCA-COLA COMPANY||KO||3.20%||$ 51.19||$ 36.27||$ 60.13|
|3M COMPANY||MMM||3.38%||$ 173.87||$ 114.04||$ 182.55|
|MERCK & CO., INC.||MRK||3.20%||$ 81.17||$ 65.25||$ 92.06|
|VERIZON COMMUNICATIONS INC.||VZ||4.29%||$ 58.55||$ 48.84||$ 61.95|
|WALGREENS BOOTS ALLIANCE, INC.||WBA||4.46%||$ 41.91||$ 33.36||$ 59.78|
Source: MS Excel Look-Up, Portfolio Insight (as of January 6, 2021)
Historical Dogs of the Dow
Dogs of the Dow Performance – Does the Strategy Work?
The main question that investors want to know is does the Dogs of the Dow strategy works? The answer is seemingly, yes. This is despite the limitations and general criticism of the Dow 30 and Dogs of the Dow. Let’s briefly review some performance studies on the Dogs of the Dow.
O’Higgins back-tested the strategy to the 1920’s and found that the Dogs of the Dow outperformed the broader market as a whole. For instance, between 1992 and 2001, the Dogs of the Dow returned 10.8% average annual returns matching the Dow 30 and beating the S&P 500, which returned 9.6%.
The Dogs of the Dow website states that since 2000 the strategy has had an average total return of 9.5% when dividends are reinvested (through end of 2019). This is compared to the average annual returns of 8.4% for the Dow 30 during the same time period. The S&P 500 has returned 7.7% in the same stretch. Notably, this time period includes both the dot com bust and the Great Recession caused by the sub-prime mortgage crisis.
Another analysis of returns from 2008 to 2018 indicates that the strategy generally works. In 2008 the Dogs of the Dow would have underperformed the DJIA. But it would have outperformed the DJIA in eight out of ten years.
Another articles indicates that in the past decade, indicates that the Dogs of the Dow beat the DJIA by more than 1% per year on average. The Dogs of the Dow only trailed the broader index in three out of 10 years.
Final Thoughts on Dogs of the Dow in 2021
Why does the Dogs of the Dow strategy seemingly work? First, the dividend yields are relatively high leading to an initial advantage compared to stock with lower dividend yields. Second, the stock often has a high dividend yield since the price has fallen. This is either due to sector or company-specific related difficulties. Often a stock on the Dogs of the Dow list is undervalued compared to the broader market. It basically follows an investing strategy of investing in stocks that are temporarily depressed. Ultimately, the Dogs of the Dow is a contrarian strategy.
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