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Want to Beat the Market? Try Dogs of the Dow 2020

December 19, 2019 11:30 Europe/Tallinn
Reading time: 9 minutes

Did you know there is an investing strategy that beat the overall Dow Jones stock market index 80% of the time in the last 10 years? It also happens to be one of the simplest investing strategies around - first popularised in 1991 by Michael B.O'Higgins in his book Beating the Dow. If you are trying to beat the market in 2020 then maybe it is something you want to know about? If so, read on!

Market movement

What is Dogs of the Dow?

Dogs of the Dow is an investing strategy that uses the highest dividend yield stocks in the Dow Jones 30 index each year. Before we look at the mechanics of the strategy, why it works and its historical performance, let's first understand the Dow Jones index in more detail, as well as the term 'dividend yield'. If you are already familiar with these then go ahead and jump straight to the next section on how the strategy works.

The Dow Jones index

The Dow Jones index is referred to by several different names including the Dow Jones Industrial Average index, the Dow 30 and - most of the time - just 'the Dow'. The index was created in the late 19th century by Charles Dow and is a price-weighted average of 30 publicly traded companies in the United States.

These 30 companies are large blue-chip companies from all different sectors, including financial, technology, consumer goods, health, energy, industrials and materials - but not from transportation or utilities. The 30 stocks that make it into the Dow 30 are overseen by a selection committee by the S&P Dow Jones Indices company and currently include:

  • American Express Co
  • Apple Inc
  • Boeing Co
  • Caterpillar Inc
  • Cisco Systems Inc
  • Chevron Corp
  • Dow Inc
  • Exxon Mobil Corp
  • Goldman Sachs Group Inc
  • Home Depot Inc
  • International Business Machines Corp
  • Intel Corp
  • Johnson & Johnson
  • Coca-Cola Co
  • JPMorgan Chase & Co
  • McDonald's Corp
  • 3M Co
  • Merck & Co Inc
  • Microsoft Corp
  • Nike Inc
  • Pfizer Inc
  • Procter & Gamble Co
  • Travelers Companies Inc
  • UnitedHealth Group Inc
  • United Technologies Corp
  • Verizon Communications Inc
  • Visa Inc
  • Walgreens Boots Alliance Inc
  • Walmart Inc
  • Walt Disney Co

* As of December 2019

It is from these Dow Jones 30 stocks that the Dogs of the Dow strategy draws its selection from. The selection criteria is based on the dividend yield of each of these companies and is explained below.

You can learn more about trading and investing in the US stock market by reading the ' How to trade the US stock market' article. You can also start your free download of the MetaTrader 5 trading platform provided by Admiral Markets which enables you to view live chart and price data of the Dow Jones 30 stocks, as well as other markets. Click on the banner below to start your free download:

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Dividend Yield

The dividend yield refers to the annual dividend payment the company pays to its shareholders. Typically, it is expressed as a percentage of the stock's current price. For example, let's assume Exxon Mobil's closing price was $69.69 and that the company pays $3.28 in annual dividends to anyone who holds their stock. That translates into a 4.7% dividend yield ($3.28 / $69.69 x 100). Now that we know more about the Dow 30 and dividend yields, let's look at how the Dogs of the Dow 2020 investing strategy uses them.

How Does the Dogs of the Dow Strategy Work?

The investing strategy works on the premise that last year's laggards may well be this year's leaders. The Dogs of the Dow strategy uses this theory by investing in the top ten highest dividend yield stocks from the Dow 30 at the beginning of each year.

The Dogs of the Dow Step by Step Process

  1. At the beginning of the year, identify the top 10 highest dividend yield stocks from the Dow 30 list
  2. Then divide the total amount of money you want to invest, into 10 equal parts
  3. Using each part, buy shares in each of the ten Dow stocks listed in the first step
  4. Hold these stocks until the end of the year
  5. At the end of the year sell the existing Dogs and then repeat the overall process again

While it may sound simple, does it actually work?

Dogs of the Dow Performance History

From 2007 - 2009 the Dogs of the Dow strategy suffered three consecutive defeats against the Dow 30 index. However, since then the investment strategy has fared much better:

  • The Dogs of Dow 2018 suffered a 1.5% loss whereas the overall Dow suffered a 6% loss
  • In 2017, The Dogs of the Dow underperformed the Dow index with 19% against 25%
  • 2016 saw the Dogs perform well with gains of 20% against the Dow's 17%
  • In 2015, the Dogs gained nearly 3% while the Dow broke even
  • In 2014, the Dogs gained 11% while the Dow gained 10%
  • 2013 saw the Dogs outperform the Dow with 35% against 30%
  • In 2012, the Dogs and the Dow both came in around 10%
  • In 2011, the Dogs outperformed the Dow by 11%
  • 2010 saw the Dogs gain 16% and the Dow 9%

So how did it perform in 2019? Well, the 2019 Dogs of the Dow failed to beat the overall Dow Jones 30 index. While the Dogs of the Dow 2019 posted an approximate average return of 13.5% whereas the Dow Jones 30 index was up more than 20% from the beginning of January 2019 to early December 2019.

No investment strategy will ever provide a perfect performance over such a long period of time. However, the tendency for the Dogs to outperform the Dow - on average - makes this a solid strategy to build upon.

Why Does Dogs of the Dow Investment Strategy Work?

The aim of the Dogs of the Dow strategy is to find undervalued blue-chip companies. It relies on the premise that blue-chip companies are relatively stable and do not alter their dividend payouts based on short term business conditions.

So, if a company's stock price falls and the dividend stays the same, the result is a higher dividend yield - which is why the Dogs of the Dow strategy uses this as a filter to identify laggards which could turn into leaders.

After all, if a blue-chip company's stock price has fallen it could mean they are at the bottom of their business cycle. Once conditions are more favourable, the stock price could start to appreciate again - thereby making it favourable for any Dogs of the Dow investors.

How to Take Part in Dogs of the Dow

There are many ways to participate in the Dogs of the Dow strategy. Some may use the possible appreciation in a Dog's stock price to trade individual stock CFDs (Contracts for Difference), thereby taking a shorter-term outlook. However, the strategy is intended to hold stocks throughout the year while also collecting any dividend payments. It's worth remembering the strategy specifically looks for high dividend yield stocks - dividends are a source of income for many investors.

The Invest.MT5 account may be more suited for this particular investment strategy as it allows you to buy physical shares, collect dividend payments with zero account maintenance fees, and offers trading commissions starting at just $0.01 per share with minimum transaction fees of just $1 on US stocks.

What Are the 2020 Dogs of the Dow?

If you are interested in the new Dogs of the Dow 2020, here they are:


Ticker

Name

Dividend Yield

1

IBM

International Business Machine

5.50%

2

XOM

Exxon Mobil Corporation

4.80%

3

VZ

Verizon Communications

4.30%

4

CVX

Chevron Corporation

4.10%

5

PFE

Pfizer

3.30%

6

KO

Coca-Cola Company

3.30%

7

CSCO

Cisco Systems

3.00%

8

MMM

3M

3.4%

9

DOW

Dow

5.1%

10

WBA

Walgreens Boots Alliance

3.1%

With the global economy off to a shaky start this year and with key market risks such as the US 2020 Presidential election, will you be banking on the Dogs of the Dow 2020 to beat the market?

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About Admiral Markets

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This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or recommendation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.