This 'safe, long-term, income-producing' classic investing strategy is due for a comeback, expert says

The classic "Dogs of the Dow" strategy has come up short lately. But over longer periods, buying the highest-yielding stocks in the Dow has been a winning strategy.


The coronavirus pandemic has tested even tried-and-true investing strategies. One that's currently struggling: The so-called "Dogs of the Dow," which focuses on high-dividend paying stocks in the Dow Jones Industrial Average.

But experts say it's still a strategy that could pay off in the long run. "When the market normalizes, this will probably still be a safe, long-term, income-producing strategy," says Jeff Hirsch, editor-in-chief of the Stock Trader's Almanac.

Here's what you need to know.

Buying Dogs is a kind of value investing

Investing strategies don't get much simpler or more classic than buying the "Dogs of the Dow." At the beginning of the year, invest in the 10 stocks in the Dow Jones Industrial Average with the highest dividend yields — those that provide investors with the highest monthly cash payouts relative to their share price.

Hold for a year, rinse, repeat.

These stocks likely sport high yields due to declining share prices, the thinking goes. And because the Dow purports to hold high-quality, blue-chip companies, these resilient stocks are likely to bounce back while providing ample dividend income to boot.

The Dogs of the Dow is a value investing strategy — one in which the investor seeks to purchase shares trading at bargain prices. If the term rings a bell, that's because it's practiced by some rather well-known investors. If you haven't heard of the godfather of value investing, Benjamin Graham, you've certainly heard of his most famous disciple: Warren Buffett 

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Video by Jason Armesto

Why 2020 has put this strategy in the doghouse 

From 2010 through 2019, the Dogs posted an annualized return of nearly 15%, more than a percentage point better than the broader Dow index.

This decade has gotten off to a rockier start. So far in 2020, the Dogs have surrendered nearly 18% compared with about a 4% loss in the Dow.

Disappointing returns
Year-to-date performance of the 10 stocks in the Dow average with the highest dividend yield
Social chart title
Note: Exxon Mobil and Pfizer were replaced in the Dow in August. Data through September 29.
kiersten schmidt/grow Dogs of the Dow, Morningstar

Astute investors will likely notice that two of this year's Dogs of the Dow — Exxon Mobil and Pfizer — are no longer, in fact, in the Dow. In anticipation of Apple's recent stock split, the index changed its lineup earlier this year, jettisoning Exxon and Pfizer, along with Raytheon, in favor of Salesforce, Amgen, and Honeywell. But because the Dogs strategy is set at the start of the year, the shakeup won't have any effect on the picks until 2021. 

And just about anyone could notice that none of the stocks in the strategy have posted a positive return this year. But that shouldn't come as too much of a surprise, given how few stocks are included, says Charles Rotblut, vice president of the American Association of Individual Investors.

"Ten stocks is a narrow slice of an already narrow index," he says. "Even in the S&P 500, the average stock has underperformed the index. If you picked any 10 of those stocks, you'd have a high chance of underperforming."

Not that this particular group of 10 hasn't had its own unique problems. Cratering oil prices in the wake of the Covid-19 pandemic beat down shares of energy giants Chevron and Exxon Mobil, for instance. Walgreens Boots Alliance and Pfizer have had difficulty fending off rival firms in their industries as markets have recovered from the pandemic.

Looking ahead in dog years

Market-watchers don't expect the Dogs' short-term prospects to improve. Over the past decade, including so far in 2020, faster-growing firms have trounced value stocks. That's unlikely to change much in the next 3 to 9 months, says Hirsch.

"Growth stocks and tech companies are what the market is running on right now," he says. Though even after long periods of lagging growthier names, value stocks have historically retaken the lead, giving Hirsch confidence in the long-term prospects for the strategy. 

Whether the Dogs will make up ground and outrun the rest of the Dow for the next decade remains to be seen. It's also not the only strategy that focuses on high-quality, dividend-paying stocks. Investors interested in such investments needn't limit their scope to the 30 stocks in the Dow or the 10 highest yielders, says Rotblut.

"If you're looking for a dividend strategy, there are plenty of exchange-traded funds that give you a much broader slice of the stock market," he says.

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