WASHINGTON. We’re back from a family Christmas get-together in (sometimes) sunny South Carolina. While we were gone, Mr. Market was up to his usual tricks. With a vengeance. Keeping with their highly frustrating pattern of one spectacular up day followed by an even more spectacular down day, it became frustrating to even contemplate an entry or exit point. So why not start the New Year with a brief column on Dogs of the Dow?
The Dogs of the Dow investing theory
The so-called “Dogs of the Dow” theory claims that buying shares in the bottom 10 Dow Jones Industrial (DJI or DJIA) stocks (out of the total of 30 in that average), as calculated by dividend yield (the value of each stock’s dividend divided by the stock’s year-end closing price) will make you money when you sell those stocks a year later.
In other words, you buy the 10 highest-yielding DJIA stocks, hold them for a year while collecting those dividends, and then sell them for a profit. (You hope.)
Dogs of the Dow Caveats
- Various gurus opine as to exactly when you should buy these stocks – year-end, January 2, whenever you get a good price in the New Year, etc. Opinions vary as well with regard to when you should sell.
- Plus, no one tells you how many shares to buy.
- The Dogs theory has actually worked quite well over the many years it’s been around. But it, like most market theories, doesn’t always work. For the record, despite the stock market’s horrendous Q4 2018 action, last year’s Dogs still ended the year by beating 2018’s closing DJIA numbers. How about that?
- Okay, right. If one had bought the 10 highest-yielding stocks in the Dow Jones Industrial Average at the beginning of 2018 and held them for a year before exiting, your Dogs would still have been down on the year. But they only lost 1.5 percent in 2018. Meanwhile, the DJIA lost 6 percent on an annual basis, while the broader-based S&P 500 was docked for an even-bigger 7 percent loss.
What’s behind the Dow Dogs theory?
Why do the Dow Dogs (often) succeed where other stocks fail? After all, they’re dogs, right? Stocks that stunk up the joint in the previous year.
The answer, as our engineering friends like to say, should be “intuitively obvious.” The DJIA, after all, includes 30 of the biggest, baddest and best-known companies in America. As go these giants, so goes the universe, at least as far as many investors are concerned.
Further, stocks in the DJIA generally pay pretty decent dividends. Which means that even in a bad year, you’ll at least get that dividend even if the company screwed up in executing its business plan.
By investing in the ten worst performers in the DJIA as of year-end, you’re presumably buying shares in the companies that screwed up that year. Therefore, you’re likely buying those shares at or near their lowest point in the calendar year, since year-end tax loss selling tends to drive their prices even lower in December.
So what you end up with by choosing the bottom ten are stocks of major companies that are selling at bargain basement prices. And, because of those low prices, their dividend yields (see above) are uncommonly high on a per share basis.
What are the supposed rewards of investing in the Dogs of the Dow?
The Dogs of the Dow theory’s assumption is that management will have to succeed in righting the ship in the coming year, lest investors and/or corporate activists try to oust company officers or replace members of the Board of Directors. With these companies highly motivated to regain their corporate reputation, performance will tend to improve. The stock price will rise. And the company might even increase that already impressive dividend a penny or two.
If everything works out, of course. Which it sometimes does not. As in General Electric (trading symbol: GE). Once a Dow Dog, its stock literally pancaked in 2017-2018 to the point where it got dropped from the DJIA entirely.
But again, particularly in tough times like we’re in right now, the Dogs will at least pay you a pretty swell dividend over the next year. So, while stocks promise to remain highly unpredictable in 2019, the Dogs are probably at rock bottom and likely won’t get clobbered as badly as, say, Apple (trading symbol: AAPL) just did. (Apple is a Dow stock but it’s not a Dow Dog. Yet.)
Presenting: The 2019 Dogs of the Dow
We’ve given you the theory. Now here’s a list of the 2019 Dogs of the Dow, listed from the bottom (highest yield) on up.
|1||IBM||International Business Machines||5.5%|
|2||XOM||Exxon Mobil Corporation||4.8%|
|7||JPM||JP Morgan Chase & Co.||3.3%|
|8||PG||Procter & Gamble Company||3.1%|
|10||MRK||Merck & Co.||2.9%|
Variations on the Dogs of the Dow Theory
Creative types eventually realized that the Mr. Market housed far more dog-like stocks in his universe than just those top-ten yielders in the Dow. Plus, on a dollars and cents basis, buying all these stocks in round lots (100 shares apiece) is a little rich for most small investors. (The bottom 5 Dogs can be a more reasonable purchase, but still…) For that reason, a number of variations have come to exist. But they’re too numerous to list here.
S&P 500 Sector Dogs
But one interesting Dow Dog variant is far more broadly based than the ten Dow Dogs. It’s known as the S-Network-® Sector Dividend Dogs Index. According to official verbiage offered on our online broker’s description page,
“The underlying index generally consists of 50 stocks on each annual reconstitution date – which is the third Friday of December each year. The index’s stocks must be constituents of the S&P 500 Index- the leading benchmark index for U.S. large capitalization stocks. The underlying index methodology selects the five stocks in each of the ten GICS sectors that make up the S&P 500 which offer the highest dividend yields as of the last business day of November.”
In other words, they change the index every year to reflect current facts. BTW, the “GICS sectors,” currently eleven in number*, divide the S&P 500 stocks into specific industrial/business categories, including such sectors as Consumer Discretionary stocks, Utilities, Real Estate ( a new sector added just last year), Information Technology, and so forth.
Thus, this index gives you a wide selection of Dogs spread out among all the GICS sectors. Thus, it’s far more broadly-based than the Dow Dogs and, to some extent at least, will generally modify to an extent the kind of extreme market factors that are making mincemeat out of most portfolios, at least at present.
More on the sector dogs. And an ETF that holds them all
Since buying all the dogs in this index would be prohibitively expensive for the average investor, there’s also a convenient way to invest in this index. At least one ETF – known as the ALPS Sector Dividend Dogs – gets you all the stocks in each year’s sector. It’s convenient-to-remember symbol: SDOG.
Although we don’t recommend stocks in this column, which is offered to you as an educational commentary / trading diary, SDOG is what we use most years to include a representative portion of Dogs in our portfolios for diversification purposes as well as (hopefully) fun and profit. SDOG often works for us. But always remember: your mileage may vary.
As we can buy SDOG shares without commission in our discount-house online brokerage account, we’re picking into these shares right now, based on how cheaply we can get them. But we plan to conclude our purchase goal within the next two weeks or less if we can. Otherwise, we’ll miss the positive effect – if any – that this year’s stable of dogs might have on our portfolios. Which, like most portfolios, ended 2018 miserably.
Good luck to all of us in 2019. We can’t imagine this year will end as badly as the last. But you never know.
*NOTE: Since an 11th sector was added to the GICS late in 2017, we haven’t confirmed whether SDOG has added five more stocks to the ETF to reflect this or has made some other adjustment. We’ll include a note on what we discover in a future column.
— Headline image: Once again, it’s the time of the year for investors to consider investing in the Dow Dogs or their equivalent. (Edited photo collage via Wikipedia)