Want to Beat the Market? Try Dogs of the Dow [2021]

January 04, 2021 12:20 Europe/Tallinn
Reading time: 9 minutes

Did you know there is an investing strategy that beat the overall Dow Jones stock market index 70% of the time in the last 10 years? 

The strategy happens to be one of the simplest investing strategies around and was first popularised in 1991 by Michael B.O'Higgins in his book Beating the Dow

If you are trying to beat the market in 2021 then keep on reading!

Dogs of the Dow

What is Dogs of the Dow?

Dogs of the Dow is an investing strategy that uses the highest dividend yield stocks in the Dow Jones 30 index each year. Before we look at the mechanics of the strategy, how it works and its historical performance, let's first understand the Dow Jones index in more detail, as well as the term 'dividend yield'. If you are already familiar with these then go ahead and jump straight to the next section on how the strategy works.

The Dow Jones Index

The Dow Jones index is referred to by several different names including the Dow Jones Industrial Average index, the Dow 30 and - most of the time - just 'the Dow'. The index was created in the late 19th century by Charles Dow and is a price-weighted average of 30 publicly traded companies in the United States.

▶️ The 30 companies are large blue-chip companies from all different sectors, including financial, technology, consumer goods, health, energy, industrials and materials - but not from transportation or utilities.

▶️ The 30 stocks that make it into the Dow 30 are overseen by a selection committee by the S&P Dow Jones Indices company. 

In 2020, the Dow Jones 30 index underwent a huge transformation with some companies being kicked out and new ones being added in. As of January 2021, the Dow Jones 30 constituents include:

  1. American Express Co
  2. Amgen Co
  3. Apple Inc
  4. Boeing Co
  5. Caterpillar Inc
  6. Cisco Systems Inc
  7. Chevron Corp
  8. Dow Inc
  9. Goldman Sachs Group Inc
  10. Home Depot Inc
  11. Honeywell International Inc
  12. International Business Machines Corp
  13. Intel Corp
  14. Johnson & Johnson
  15. Coca-Cola Co
  16. JPMorgan Chase & Co
  17. McDonald's Corp
  18. 3M Co
  19. Merck & Co Inc
  20. Microsoft Corp
  21. Nike Inc
  22. Procter & Gamble Co
  23. Travelers Companies Inc
  24. UnitedHealth Group Inc
  25. Salesforce.com Inc
  26. Verizon Communications Inc
  27. Visa Inc
  28. Walgreens Boots Alliance Inc
  29. Walmart Inc
  30. Walt Disney Co

Source: CNBC January 2021

The newest additions to the Dow Jones 30 index are Amgen, Honeywell and Salesforce, with Pfizer, Raytheon and ExxonMobil being removed. ExxonMobil was actually one of the oldest stocks in the index and has been in there since October 1928! Raytheon was only in the index for four months last year before being dropped, as was General Electric ending its 111-year membership to the Dow Jones 30. 

It is from these Dow Jones 30 stocks - which are carefully selected - that the Dogs of the Dow strategy draws its selection from. The selection criteria is based on the dividend yield of each of these companies and is explained in more detail in the next section.

You can learn more about trading and investing in the US stock market by reading the ‘How to trade the US stock market’ article. You can also start your free download of the MetaTrader 5 trading platform provided by Admiral Markets UK Ltd which enables you to view live charts and price data of the Dow Jones 30 stocks, as well as other markets. 

Click on the banner below to start your free download:

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Dividend Yield

The dividend yield refers to the annual dividend payment the company pays to its shareholders. Typically, it is expressed as a percentage of the stock's current price. It is a widely used metric to also help identity undervalued shares which you can learn more about in the ‘What is Value Investing?’ article. 

▶️ EXAMPLE: Let’s assume Intel’s closing price was $69.69 and that the company pays $3.28 in annual dividends to anyone who holds their stock. That translates into a 4.7% dividend yield ($3.28 / $69.69 x 100). 

Companies with a depressed share price tend to boost the dividend yield. This is why it is used as a filter to find undervalued stocks. This becomes even more interesting when using it on the Dow Jones 30 index as the companies in the index tend to represent the strongest companies in the economy whose job is to get their share price higher.

You can learn more about dividend stocks in the ‘Best Dividend Stocks for Income’ article. Now that we know more about the Dow 30 and dividend yields, let's look at how the Dogs of the Dow 2021 investing strategy uses them.

How does the Dogs of the Dow strategy work?

The investing strategy works on the premise that last year's laggards may well be this year's leaders. The Dogs of the Dow strategy uses this theory by investing in the top ten highest dividend yield stocks from the Dow 30 index at the beginning of each year.

✳️ The Dogs of the Dow Step by Step Process

  1. At the beginning of the year, identify the top 10 highest dividend yield stocks from the Dow 30 list.
  2. Then divide the total amount of money you want to invest into 10 equal parts.
  3. Using each part, buy shares in each of the ten Dow stocks listed in the first step.
  4. Hold these stocks until the end of the year.
  5. At the end of the year sell the existing Dogs and then repeat the overall process again.

While it may sound simple, does it actually work?

Does the Dogs of the Dow investment strategy work?

The aim of the Dogs of the Dow strategy is to find undervalued blue-chip companies. It relies on the premise that blue-chip companies are relatively stable and do not alter their dividend payouts based on short term business conditions.

So, if a company's stock price falls and the dividend payout stays the same, the result is a higher dividend yield - which is why the Dogs of the Dow strategy uses this as a filter to identify laggards which could turn into leaders.

After all, if a blue-chip company's stock price has fallen it could mean they are at the bottom of their business cycle. Once conditions are more favourable, the stock price could start to appreciate again - thereby making it favourable for any Dogs of the Dow investors.

Dogs of the Dow Performance History

From 2007 - 2009 the Dogs of the Dow strategy suffered three consecutive defeats against the Dow 30 index. However, since then the investment strategy has fared much better:

  • 2010 saw the Dogs gain 16% and the Dow 9%.
  • In 2011, the Dogs outperformed the Dow by 11%.
  • In 2012, the Dogs and the Dow both came in around 10%.
  • 2013 saw the Dogs outperform the Dow with 35% against 30%.
  • In 2014, the Dogs gained 11% while the Dow gained 10%.
  • In 2015, the Dogs gained nearly 3% while the Dow broke even.
  • 2016 saw the Dogs perform well with gains of 20% against the Dow's 17%.
  • In 2017, The Dogs of the Dow underperformed the Dow index with 19% against 25%.
  • The Dogs of the Dow 2018 suffered a 1.5% loss whereas the overall Dow suffered a 6% loss.
  • The Dogs of the Dow 2019 posted gains of 15.4% underperforming the Dow index which recorded a 22.3% gain. 
  • The Dogs of the Dow 2020 recorded a loss of -12.6% while the overall index recorded gains of 7.2%. 

Did you know that you can create a portfolio of dividend-paying stocks with the Admiral Markets Invest.MT5 account? You can open an account with only €1 and enjoy minimum transaction fees of just $1 on US stocks!

Invest in stocks

In recent years, when the Dow 30 index has done well so has the Dogs of the Dow investing strategy, albeit with some underperformance since 2017. The Dogs of the Dow 2020 was a unique year in which the strategy recorded a -12.6% loss while the Dow 30 stock market index recorded a 7.2% gain. 

The long-term monthly chart of the Dow Jones 30 index below shows the price action of 2020 in-between the two dotted vertical lines:

Dogs of the Index DJI30 Index

Source: Admiral Markets MT5 Supreme Edition, DJI30, Monthly - Data range: from 1 Jun 2005 to 4 Jan 2021, accessed on 4 Jan 2021 at 11:45 am GMT. Please note: Past performance is not a reliable indicator of future results.

As the Dogs of the Dow is considered a value-based investing approach it suffered in 2020 during the coronavirus pandemic as investors chose growth-based stocks instead. Growth-based stocks typically included technology stocks that benefited from remote working. You can learn more about this style of investing in the ‘What is Growth Investing?’ article.  

There were some larger themes that played against the Dogs of the Dow 2020 as well. This included the collapse in energy stocks due to a crash in oil prices and some companies such as Boeing and Disney suspending dividend payments, albeit temporarily.  

No investment strategy will ever provide a perfect performance over such a long period of time. However, the tendency for the Dogs to outperform the Dow - on average - makes this an attractive strategy to build upon.

How to Take Part in Dogs of the Dow

There are many ways to participate in the Dogs of the Dow strategy. Some may use the possible appreciation in a Dog's stock price to trade individual stock CFDs (Contracts for Difference), thereby taking a shorter-term outlook. However, the strategy is intended to hold stocks throughout the year while also collecting any dividend payments. It's worth remembering the strategy specifically looks for high dividend yield stocks - dividends are a source of income for many investors.

You can also stay up to date with all the latest market trends through the Admiral Markets Spotlight webinar series. Three times a week, three professional traders talk through the markets, providing you with the latest insights and strategies to use. 

Register for your complimentary spot today by clicking on the banner below:

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What are the current Dogs of the Dow for 2021?

If you are interested in the new Dogs of the Dow for 2021, here is the list as of 31 December 2020:

Number

Company

Symbol

Dividend Yield

1

Chevron

CVX

6.11%

2

IBM

IBM

5.18%

3

Dow

DOW

5.05%

4

Walgreens

WBA

4.69%

5

Verizon

VZ

4.27%

6

3M

MMM

3.36%

7

Cisco

CSCO

3.22%

8

Merck

MRK

3.18%

9

Amgen

AMGN

3.06%

10

Coca-Cola

KO

2.99%

Source: Nasdaq Dogs of the Dow 2021 list, using dividend yields as of 31 December 2020.

2021 is set to be an interesting year for global stock markets. After the coronavirus pandemic sell-off in early 2020, most global stock markets rallied higher. US stocks markets actually went on to record all-time highs. 

However, many investors may think twice about growth stocks as they are already trading at high levels. Some analysts forecast that investors may bank some profits on growth-based stocks and then reinvest into undervalued stocks, such as those in the current Dogs of the Dow 2021 list. 

Overall, analysts forecast the stock market rally to continue as the coronavirus vaccine gets rolled out and economies start to pick up again. Investors may choose to allocate capital to a diverse range of sectors of which the Dogs of the Dow 2021 list provides. For example:

▶️ Chevron is in the energy sector. An increase in travel around the world could support higher prices for energy-related asset classes. 

▶️ IBM is in the technology sector. While most tech shares enjoyed significant moves higher in 2020 IBM has lagged. However, they are well-positioned to capitalise from the transition into blockchain technology as they are considered a leader in the field. 

▶️ Amgen is in the biotechnology sector which has attracted more attention as biotech companies were leaders in the development of a coronavirus vaccine. 

Of course, the Dogs of the Dow investing strategy can only work if following the five-step process listed earlier. Any changes or additional filters is likely to change the performance and outcome of the strategy. But understanding what’s going on in the market can help build confidence in the investments you have. 

Why invest in the Dogs of the Dow with Admiral Markets?

If you are thinking of taking a long-term view on the stock market and would like to invest in public companies from around the world, including the Dogs of the Dow for 2020, you may consider our accounts where you can enjoy benefits such as:

The ability to invest in thousands of stocks and exchange traded funds (ETFs) from 15 of the largest stock exchanges in the world.

Receive free real-time market data, with no delays, at no extra cost.

Create a stream of passive income by collecting dividend payouts.

Use the world-renowned MetaTrader 5 multi-asset class trading platform.

About Admiral Markets

Admiral Markets is a multi-award winning, globally regulated Forex and CFD broker, offering trading on over 8,000 financial instruments via the world's most popular trading platforms: MetaTrader 4 and MetaTrader 5. Start trading today!

This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or recommendation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.

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