Investors seeking a reliable and proven strategy for maximizing their dividend returns may find value in the “Dogs of the Dow” approach. Invented by investor Michael O’Higgins in the early 1990s, this strategy involves purchasing the 10 highest-dividend yielding stocks from the Dow Jones Industrial Average at the beginning of every year. The goal is to not only earn cash payouts but also benefit from potential price appreciation. While the Dogs of the Dow strategy is not foolproof, it is backed by certain theories that make it appealing to many investors.
One of the reasons why the Dogs of the Dow strategy is popular is due to the high quality-tilt of the Dow. The index comprises well-established and reputable companies, making it an attractive investment option for those seeking stability. Moreover, the strategy focuses on the dividend yield, which tends to rise when stock prices fall. This unique characteristic creates an opportunity for investors to buy stocks at a potentially lower price relative to their historical performance, signaling a potential rebound.
Looking ahead to 2024, the options market suggests that traders anticipate the Federal Reserve to cut interest rates. This expectation enhances the potential benefits of the Dogs of the Dow strategy, especially for those seeking stocks with healthy dividend yields. Kevin Simpson, founder and chief investment officer at Capital Wealth Planning, believes that lower interest rates could favorably impact this strategy. He explains, “You would be expecting the strategy to do better in an environment when interest rates are going down as opposed to increasing.” However, he advises investors to carefully consider the fundamentals of each company before making investment decisions.
While the Dogs of the Dow strategy has delivered favorable results in the past, it is not a guaranteed winner every year. In 2022, when equity markets declined, the Dogs outperformed the broader market. However, in 2023, they have lagged behind the S&P 500 as the so-called “Magnificent 7” led the market higher. As of the end of the year, an equal weighted portfolio of the Dogs of the Dow would have generated a modest total return of just 6.7%, slightly underperforming the full Dow and significantly trailing behind the S&P 500 and Nasdaq Composite indices.
Given the underperformance of the Dogs of the Dow in recent years, it is not surprising that only two members are poised to break into the top 10 highest-dividend yielding stocks for 2024. According to current data, JPMorgan and Intel are projected to be replaced by Coca-Cola and Goldman Sachs. However, it is important to note that the composition of the list could still change by the end of the year.
While the Dogs of the Dow strategy emphasizes buying all 10 stocks, investors have the flexibility to adapt the strategy to suit their preferences. Investors can follow the spirit of the strategy without necessarily investing in all 10 names. Kevin Simpson, who follows the Dogs of the Dow strategy, currently owns six out of the ten preliminary 2024 list stocks, including Coca-Cola, IBM, and Verizon. Simpson particularly highlights Verizon as a stock that has shown signs of stabilization after a turbulent period and is improving its fundamentals. He explains, “They’ve had tremendous capital expenditures for 5G, and now they’re trying to right size their balance sheet. They do have a lot of debt, but they were smart about it before rate hikes to lock in a lot of low interest rate paper.”
The Dogs of the Dow strategy offers dividend-hungry investors a systematic approach to investing in blue-chip stocks. While the strategy has experienced ups and downs over the years, its foundation on high-quality companies and the potential for favorable pricing opportunities makes it an appealing option. As we approach 2024, the two new additions to the Dogs of the Dow list—Coca-Cola and Goldman Sachs—signal potential changes in the composition of the highest-dividend yielding stocks. However, investors should carefully evaluate individual stocks and analyze their fundamentals before making investment decisions.
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