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Dogs of the Dow 2020 Edition preview: CDN’s preliminary candidates

Written By | Dec 28, 2019
Dogs of the Dow 2020

Image by angel 1238812 from Pixabay. CC 0.0 license.

WASHINGTON – As 2019 draws to what we hope will be a bullish close, it’s time to look at a preview of this year’s “Dogs of the Dow 2020.” Simply stated, the Dogs of the Dow Theory states that if you buy shares in the 10 highest yielding stocks listed in the current Dow Jones 30 Industrials, you’ll not only make swell money just from those dividends by next December. You’ll also collect handsome capital gains.

Does this simple strategy really work? And if so, why?

Well, first of all, it does work. Sometimes.

Is anything in the market guaranteed?

When I attended training seminars en route for qualifying for my stockbroker’s license back in the 1980s, the instructors constantly drummed one big thing into my head, again and again. “Don’t ever use the word ‘guarantee’ with a client.” The reason why should be intuitively obvious. Pretty much in life, absolutely nothing is guaranteed, save, perhaps, for death and taxes.

So it goes with those old, sometimes reliable Dogs of the Dow, also referred to as the “Dow Dogs.”

The Dow Dogs get to be the official Dogs of the Dow 2020 as of their price and yield on the closing day of the calendar trading year; in this case, December 31, 2019. By dividing the dividend by the closing price of the stock, you get the effective yield on that day. Then, you order the Top 10 Dow stocks as of that final day’s close in descending order, fattest dividend, to the next, to the next, etc. Until you’ve got ten of them. The ten highest dividend paying Dow stocks by yield. And, voilà!  You have the Dogs of the Dow 2020.

Also Read: New Year’s Day 2020: Holiday trading schedule, plus IRA info

More on the Dogs of the Dow 2020 Edition

Sound weird? What’s the magic bullet in this longtime investment potion? A recent article in 24/7 Wall St. explains it as follows.

“[I]nvestors buy the 10 highest yielding dividends of the 30 Dow stocks. Historically they were higher than others frequently based on their shares selling off or underperforming; hence, the term ‘dog.’”

What you’re effectively buying, of course, are essentially the 10 worst performing Dow stocks of 2019. So why would this be a good idea? Don’t we want the best?

Well, usually we do.

But in this case, the typical Dow Dog has underperformed other Dow stocks and Mr Market as well, for much of the calendar year, for various reasons. Given their poor performance, they often undergo heavy tax-loss selling late in the calendar year. Investors holding these shares are generally disgusted with their performance, and tend to dump a lot of shares for the capital loss, which they can net out against their capital gains, hopefully lowering their 2019 tax bill when they file.

Stocks unfairly dumped at year-end tend to jump back up, at least a bit

That end of year dump often gets these shares down below fair value. This increases their effective yield at the same time. Which means that odds favor at least a modest bounce upward during the next calendar year. The stocks have the support of their usually large dividend plus every stock’s tendency to increase in price over time until it hits fair value. (Or sink until it reaches fair value. But with the Dogs, we’re being optimistic.)

So, theoretically at least, you get a swell dividend over the next 12 months, and at least some modest, normal growth, assuming the companies in question don’t have some serious hidden problems.

Dow shares are traded very heavily as well, meaning there’s a lot of liquidity in these shares which helps keep you in the game.

At least there’s a nice dividend play in the Dow Dogs

The Dogs of the Dow strategy generally provides you with better-than-average dividend payouts. And it often (but not always) gives you at least some capital gain to brag about when you finally sell, given that you’ve probably bought it in “oversold” condition, which means it’s mispriced on the downside.

Preliminary list of 2020’s projected Dow Dogs as of mid-December 2019

Here’s a current list of Dogs of the Dow 2020 candidates as listed in that 24/7 Wall St piece, which came out just a few days ago. Trading symbol follows stock name.

  1. Dow Inc. (NYSE: DOW), 5.1%
  2. Exxon Mobil Corp. (NYSE: XOM), 4.9%
  3. International Business Machines Corp. (NYSE: IBM), 4.8%
  4. Verizon Communications Inc. (NYSE: VZ), 4.0%
  5. Chevron Corp. (NYSE: CVX), 4.0%
  6. Pfizer Inc. (NYSE: PFE), 3.7%
  7. 3M Co. (NYSE: MMM), 3.4%
  8. Walgreens Boots Alliance Inc. (NASDAQ: WBA), 3.1%
  9. Cisco Systems Inc. (NASDAQ: CSCO), 3.1%
  10. Coca-Cola Co. (NYSE: KO), 3.0%

24/7 also notes the following information.

“Keep in mind that the list today may be slightly different from the formal list as of the close of trading on December 31, 2019. Most of these names will stay on the list due to their dividends being higher, but there are some runners-up that might make the list. This is the current order of the Dow stocks by yield, highest to lowest (rounded up or down to nearest one-tenth of a percent, from a Finviz screener), that would make for the 2020 Dogs if the markets were to close now.”

Check back here after December 31 for our final official Dogs of the Dow 2020 list

So we’ll take that advice ourselves, and check things out some time after the December 31, 2019 market close. That’ll give us our official Dow Dogs. At which point, we’ll have to figure out which, if any of them, we should buy. Then we’ll share our reasoning and our picks with you, some time right after the New Year’s Day Waterford crystal ball hits the bottom of its drop on Times Square as 2020 begins.

An alternative Doggy Strategy: SDOG

Since traders and investors are always searching for ways to invent new investing strategies or refine old ones, variations on the original Dogs of the Dow Theory are no exception. One interesting variant is the ALPS Sector Dividend Dogs ETF (trading symbol: SDOG).

The managers of this fund put out the following descriptive verbiage of their ETF on various sites, some linkable, some not. This one is linkable.

“[SDOG] seeks investment results that replicate as closely as possible, before fees and expenses, the performance of the S-Network® Sector Dividend Dogs Index. The underlying index generally consists of 50 stocks on each annual reconstitution date, which is the third Friday of December each year. [The relevant] underlying index’s stocks must be constituents of the S&P 500 Index, the leading benchmark index for U.S. large capitalization stocks. [This] … index methodology selects the five stocks in ten of the eleven GICS sectors that make up the S&P 500 which offer the highest dividend yields as of the last business day of November. “

Italics are mine, pointing to the fact that SDOG is actually investible right now, since they just reconstituted and recalculated the index for 2020 on the 20thof December, 2019. That means that you could get into this ETF right now, as opposed to having to wait for the final Dogs of the Dow 2020 sometime after the market’s December 31 close.

We might need to be careful with an January 2020 early buys

However, as I have a gut feeling we’ll get an early sell off in a great many stocks as January begins, we might get a better price on SDOG shares if we wait a bit. But the Santa Claus Rally we’re currently experiencing could keep on going a bit longer, so I could be wrong.

At any rate, it’s not too early to start paying attention to SDOG right now. I actually owned some shares of this one for about 6-7 months earlier in 2019 and made a nice profit on them. Although I could have held them until recently and made a bit more.

Using SDOG as a Doggy strategy

Over the years, in fact, I find that SDOG has proved a rewarding performing, and a bit luckier than the official Dow Dogs. But your mileage may vary and every year is different.

On the other hand, SDOG tends to be a bit less volatile. Since it’s spread out over 10 of the 11 S&P 500 sectors, it contains a greater variety of stocks than just buying the 10 Dow Dogs, making it less volatile when the market gets crazier. SDOG automatically gives you greater diversity as well. And it contains some really high dividend payers along with other star large cap stocks. These include names like Abbvie (ABBV), Altria and Philip Morris International (MO and PM), Bristol-Meyers (BMY), etc.

Final run down on both the Dow Dogs and SDOG as soon as possible after the turn of the year. So be sure to check back with CDN Business. Maybe a day or so after you’ve drained that last drop of champagne.

– Headline image:  Image by angel1238812 from Pixabay CC 0.0 license.



Terry Ponick

Biographical Note: Dateline Award-winning music and theater critic for The Connection Newspapers and the Reston-Fairfax Times, Terry was the music critic for the Washington Times print edition (1994-2010) and online Communities (2010-2014). Since 2014, he has been the Senior Business and Entertainment Editor for Communities Digital News (CDN). A former stockbroker and a writer and editor with many interests, he served as editor under contract from the White House Office of Science and Technology Policy (OSTP) and continues to write on science and business topics. He is a graduate of Georgetown University (BA, MA) and the University of South Carolina where he was awarded a Ph.D. in English and American Literature and co-founded one of the earliest Writing Labs in the country. Twitter: @terryp17