In this post, we will cover the topic of the Dogs of the Dow investment strategy, but first, here is our disclosure.
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What is the Dow Jones Industrial Average?
News outlets and publications report on the Dow Jones’ every move. Financial talking heads on TV frantically tell us the meaning of every up and down. They report on it like it is some living monster, and your entire financial future relies on keeping it happy. It is enough to induce anxiety. But what exactly is the Dow Jones, and why is it so closely followed?
The Dow Jones Industrial Average is probably the most well-known stock market index and is often called the “Dow Jones” or simply “The Dow.” It comprises 30 large blue-chip companies that trade on the New York Stock Exchange and NASDAQ. These 30 large companies are often referred to as the “components” of the Dow.
The components of the Dow Jones are large, stable companies stretching across the economy’s different sectors. Their weight in the Dows Jones is based on stock price, not market cap. These 30 companies that make up the Dow Jones are not permanent fixtures, and companies will be removed and added to the Dow from time to time to ensure it best represents the economy.
Another essential feature of the components that make up the Dow Jones is that the majority issue dividends. These dividends are central to the Dogs of the Dow investing strategy.
Taking the Chance on the Dogs of the Dow
As 2023 approached, I began seeing more articles on an investing strategy called the Dogs of the Dow. I was vaguely familiar with this investment strategy and decided to dive deeper into the details. As it turns out, the Dogs of the Dow is a relatively simple approach.
The Dogs of the Dow attempts to invest in undervalued blue-chip companies with dividend yield as the only metric. On the last trading day of the year, you identify the ten companies with the highest dividend yields in the Dow Jones and invest equal amounts into each at the start of the new year. You repeat this process every year, swapping out stocks as needed. That’s it. Simple. Right?
I love simplicity when it comes to investing, and I liked that this strategy centers around established blue-chip companies with above-average dividends. I am optimistic this is a less risky approach when investing in individual stocks and a good group of stocks to be held with the potential for a recession in 2023.
So, with Crash Test Money’s mission in mind, which is to provide high-quality content on money topics through first-hand experience, I decided now was the perfect time to give the Dogs of the Dow a test drive.
At the start of January, I took up positions in the 2023 Dogs of the Dow, and I am now the new owner of stock in Verizon, Dow, Intel, Walgreens, 3M, IBM, Amgen, Cisco Systems, Chevron, and JP Morgan.
Now that we have this brief introduction let’s delve a little more into the Dogs of the Dow and discover why dividend yield is so important. The first stop along the way is the Dow Jones.
The Dogs of the Dow Investing Strategy
We touched on this at the beginning of this post. The Dogs of the Dow investing strategy is a popular, straightforward investment approach. This approach focuses on investing in established blue-chip companies that may be undervalued. You use the relationship between dividend yield and stock price is identify these undervalued companies. Quite simply, the Dogs of the Dow approach is as follows:
- On the last trading day of the year, identify the 10 companies in the Dow Jones that finished with the highest dividend yields.
- Then at the start of the new year, invest equal dollar amounts into the stocks of these 10 companies.
- Hold the stocks in these 10 companies until the end of the year
- When the next year rolls around, repeat the process and swap out stocks as needed so that you are holding the new Dogs of the Dow.
Why the Focus on Dividend Yield?
Why is the dividend yield used to identify the Dogs of the Dow instead of the total returns for the year? Remember, you are trying to identify undervalued companies, not the worst performers. A company’s dividend yield helps in this process as it has an inverse relationship to stock price.
- When a company’s stock price increases, its dividend yield decreases.
- When a company’s stock price decreases, the dividend yield increases.
Example of How Stock Price Impacts Dividend Yield
Suppose we have a company, Super Blue Chip Inc., in the technology sector with a stock price of $50 per share and a yearly dividend of $1 per share. As a result of its current dividend and stock price, the dividend yield would be 2% (1/50 = 0.02 or 2%).
Imagine it is 2021, and Super Blue Chip Inc. is having a great year and doubles its stock price to $100 per share. This increase causes Super Blue Chip Inc.’s dividend yield to decrease to 1% (1/100 = 0.01 or 1%).
In 2022, Super Blue Chip Inc. is having a horrible year and suffering during the tech selloff. Their stock plunges to $25 per share. What happens to the dividend yield? It increases to 4% (1/25 = 0.04 or 4%).
If Super Blue Chip Inc. were a actual company and part of the Dow Jones, its surging stock price in 2021 would have excluded it from the Dogs of the Dow because its dividend yield was only 1%. This means Super Blue Chip Inc. was not considered undervalued when it had a stock price of $100 per share and a 1% dividend yield.
In 2022, Super Blue Chip Inc. would have been considered undervalued based on its dividend yield. It had a bad year; that 4% dividend would have been enough to land it in the Dogs of the Dow 2023. If you decided to invest in the ten companies in the Dogs of the Dow 2023, you would have bought Super Blue Chip Inc shares when they are down 75% with a 4% dividend.
Now you see why dividend yield is the driving force behind the Dogs of the Dow. However, using dividend yield as the only deciding factor has limitations.
Limitations of Using Dividend Yield as the Qualifier for the Dogs of the Dow
An important point to remember is that going off dividend yield alone does not mean the ten Dogs of the Dow were the worst performers in the Dow Jones. They can be, but they may also be some of the best performers from the previous year. You only have to look as far as the ten companies that make up the Dogs of the Dow for 2023 to see an example of this situation.
The 2023 Dogs of the Dow include both Intel and Chevron. In 2022, Intel was the worst performer in the Dow Jones, losing over 50%, but Chevron was the best performer gaining over 50%. How can Chevron be in the Dogs of the Dow after gaining 50% in 2022?
Chevron is a dividend aristocrat and has paid and increased its dividend for over 25 years. This means Chevron already had a high baseline dividend yield. After gaining 50% in 2022, Chevron still yields above 3%. This dividend yield is enough to land Chevron in the Dogs of the Dow for 2023, even though it was the best performer.
Can Chevron really be undervalued? It very well may be. The important point here is you can have companies with positive stock returns that are undervalued. Conversely, you can have companies with negative stock returns that are overvalued.
There will also be companies in the Dow Jones that may never make the Dogs of the Dow list regardless of their performance. These are companies that have minimal dividends or no dividends at all. Boeing, Walt Disney, and Salesforce offer no dividends. Apple and Visa have dividend yields that are so low they would need to implode for their dividend yields to increase enough to be included in the Dogs of the Dow.
Does the Dogs of the Dow Work?
Over the years, the Dogs of the Dow returns have tracked closely with the Dow Jones and S&P 500. There are some years where it does much better and others where it does much worse than both indexes. In more recent times, the Dogs of the Dow strategy has underperformed both the Dow Jones and S&P 500, with the exception being 2022.
For example, in 2020, the Dow Jones gained over 7%, and the S&P 500 gained over 18%. The Dogs of the Dow? Well, they lost over 12%.
In 2021, the Dogs of the Dow had solid gains but still trailed the Dow Jones by over 4%. That is nothing compared to the S&P 500, where the Dogs of the Dow were outgained by over 16%! What about 2022?
In 2022, the Dogs of the Dow strategy paid off and solidly outpaced the Dow Jones and S&P 500. Overall, the Dogs of the Dow were down 2%. In comparison, the Dow Jones and S&P 500 were down close to 9% and 20%, respectively.
All of this is to say when it comes to investing, there are no guarantees and sure things. Remember, past performance does not guarantee future performance.
The 2023 Dogs of the Dow
Below is the list of the 2023 Dogs of the Dow sorted by dividend yield as of 1/3/2023.
| Company | Ticker | Sector | Dividend | 1/3/2023 Price | 2022 Return | 2022 Dog |
|---|---|---|---|---|---|---|
| Verizon | VZ | Communications | 6.62% | $39.40 | -24.87% | Yes |
| Dow | DOW | Materials | 5.56% | $50.39 | -11.39% | Yes |
| Intel | INC | Information Technology | 5.52% | $26.43 | -50.33% | Yes |
| Walgreens | WBA | Consumer Staples | 5.14% | $37.36 | -29.59% | Yes |
| 3M | MMM | Industrials | 4.97% | $119.92 | -32.53% | Yes |
| IBM | IBM | Information Technology | 4.68% | $140.89 | 3.57% | Yes |
| Amgen | AMGN | Health Care | 3.24% | $262.64 | 15.86% | Yes |
| Cisco Systems | CSCO | Information Technology | 3.19% | $47.64 | -24.57% | No |
| Chevron | CVX | Energy | 3.16% | $179.49 | 50.50% | Yes |
| JPMorgan | JPM | Financials | 2.98% | $134.10 | -17.07% | No |
Key Characteristics of the 2023 Dogs of the Dow
What were some of the first thoughts that came to mind when you saw this list? I am guessing they concentrated on the idea that these are large and familiar companies. These types of companies form the backbone of the Dogs of the Dow strategy and have key characteristics that shape it. So what are those characteristics?
Size
The companies that comprise the Dogs of the Dow are massive, as they are all large or mega-cap companies.
To put this in perspective, Dow and Walgreens are the only companies on this list with a market cap of less than $100 billion. Every other company on this list has a market cap that exceeds $100 billion, with Chevron and JP Morgan having market caps exceeding $300 billion and $400 billion, respectively.
Diversified
The companies that comprise the 2023 Dogs of the Dow are a cross-section of the economy. They represent 8 of the 11 market sectors of the economy, with a slight overweight in Information Technology. You may have been expecting this, as the Information Technology sector suffered some of the worst losses in 2022.
Sectors Represented:
Above-Average Dividend Yields
The average dividend yield for the Dow Jones is just over 2% and is less than 2% for the S&P 500. The Dogs of the Dow for 2023 easily trumps both with an average dividend yield of 4.5%. This is an excellent dividend yield and even more so when considering the quality of companies paying these dividends.
Not All Were Losers; Some Were Winners
Remember, the Dogs of the Dow uses dividend yield, not stock returns, to determine what company is in or out. A company’s inclusion in the Dogs of the Dow does not mean it was among the bottom ten performers from the previous year. If this were the case, you would have seen names like Nike, Apple, Microsoft, Salesforce, and Disney on the 2023 list.
Since this list is solely based on the dividend yield, you can have companies with a mix of yearly returns, some toward the bottom and others near the top of the Dow Jones. For example, Intel, Walgreens, and 3M had some of the worst returns on the Dow Jones in 2022, but IBM, Amgen, and Chevron had some of the best.
The Results: Only Time Will Tell
I am optimistic as I embark on this journey. The Dogs of the Dow strategy involves investing in established blue-chip companies with high dividend yields that may be undervalued. Notice I said “may be undervalued” because no investment strategy is 100% accurate.
Ultimately, I will know the final results of the Dogs of the Dow on the last trading day of the year. In the meantime, I will provide regular updates on how this strategy performs.
The Dogs of the Dow have been identified, and the stocks have been purchased. Let the journey begin!
Update: The first quarter returns are in and not good. We are now halfway through the second quarter, and Dogs of the Dow 2023 strategy is looking worse. I must admit that my optimism is starting to turn to pessimism. Whenever I try one of these investment strategies, I come to the same conclusion.
What is that conclusion? I should have just invested in an S&P 500 index fund.
