Definition
“Dogs of the Dow” is an investment strategy that involves purchasing the 10 highest dividend-yielding stocks within the Dow Jones Industrial Average, typically at the beginning of each year. The premise is that the “dogs” or underperforming stocks have a high potential for growth in addition to their dividend income. It is a form of value investing.
Key Takeaways
- The “Dogs of the Dow” is an investment strategy that focuses on buying the ten highest dividend-yielding stocks in the Dow Jones Industrial Average at the beginning of each year.
- This strategy is based on the belief that blue-chip companies do not alter their dividend to reflect trading conditions and, therefore, the dividend yield can be a measure of the average worth of the stock. The high-yield stocks are termed as “dogs” due to their underperformance.
- Dogs of the Dow provides a straightforward approach for investors and has shown to be quite successful historically. It also allows investors to easily adjust their portfolio on an annual basis.
Importance
The finance term “Dogs of the Dow” is significant as it is a popular investment strategy aimed at buying the 10 highest-dividend-yielding stocks listed on the Dow Jones Industrial Average at the beginning of each year.
The theory behind this strategy is that the Dow Jones’s laggards, or “dogs,” tend to do well in the subsequent year.
The key advantage is that it gives investors a straightforward formula for investing in well-established and financially stable companies listed on the Dow, which helps in ensuring steady returns and mitigating risk.
Essentially, the Dogs of the Dow method ensures that investors are always invested in blue-chip companies with relatively high yields, potentially leading to strong long-term returns while still limiting downside risk.
Explanation
The Dogs of the Dow is an investing strategy that has the purpose of beating the Dow Jones Industrial Average (DJIA) annually. It is founded on the principle of buying the ten of the 30 companies in the DJIA that have the highest dividend yield at the beginning of each year.
The fundamental idea here is that blue-chip companies do not alter their dividend to reflect trading conditions and, therefore, the dividend is a measure of the average worth of the company. The Dogs of the Dow strategy is used by investors who are aiming to balance the line between high yield and stability.
By focusing on the Dow blue-chip stocks that deliver the highest dividends, they’re banking on the idea that any company in the DJIA, a list representing the health of the industrial sector of the U.S. stock market, not only is likely to have the capability to endure market downturns, but also has the potential capacity to outperform the index.
This strategy offers disciplined investing, while maximizing total return potential, making it a useful option for many investors.
Examples of Dogs of the Dow
“Dogs of the Dow” is a popular investment strategy where investors buy the 10 highest dividend-yielding stocks in the Dow Jones Industrial Average (DJIA) at the beginning of each year. The strategy is based on the belief that blue-chip companies offer good returns over time and any underperformance is temporary.Here are three real-world examples:
**IBM example (2018)**: For instance, at the start of 2018, IBM was one of the “Dogs of the Dow” due to its high dividend yield relative to other Dow components. Despite concerns over the company’s ability to grow, the company’s stock price appreciated by around 20% and paid a healthy dividend throughout the year, thus providing a good return to investors who bought the stock at the start of the year.
**Pfizer example (2015)**: In 2015, Pfizer was in the Dogs of the Dow list. Despite enduring some challenges in that year, the company paid out a high dividend yield. Investors who followed the methodology had invested in the company at the beginning of the year, and by the end of the year, they enjoyed a return on investment that was boosted by these dividends.
**ExxonMobil example (2020)**: ExxonMobil was included in the Dogs of the Dow list in 2020 due to its high dividend yield. Although the company experienced significant challenges due to low oil prices and a global pandemic, it maintained its dividend payout, providing a substantial return for “Dogs” strategy investors even when the stock price was mostly on the decline. Remember, while Dogs of the Dow is a simple and historically effective strategy, it doesn’t guarantee returns every year. Its effectiveness can vary depending on market conditions and specific company performances.
FAQs about Dogs of the Dow
What are the Dogs of the Dow?
The Dogs of the Dow is an investment strategy that involves buying the 10 highest dividend-yielding stocks of the Dow Jones Industrial Average (DJIA) at the beginning of each year. These are typically well-established and financially sound companies.
How are the Dogs of the Dow chosen?
The Dogs of the Dow are selected by sorting the 30 companies in the DJIA in descending order by their dividend yield at the end of each year. The top 10 companies are those that make up the Dogs of the Dow for the following year.
What is the purpose of the Dogs of the Dow strategy?
The main purpose of the Dogs of the Dow strategy is to attempt to beat the market. It’s based on the assumption that blue-chip companies will not reduce their dividends even during times of financial troubles. This allows investors to receive a steady income and potentially profit from any increase in the company’s share price.
What are the pros and cons of using the Dogs of the Dow strategy?
The Dogs of the Dow strategy is relatively easy to implement and offers high-income potential due to the high dividend yields. However, it also has its drawbacks. The strategy is highly dependent on the performance of a small set of stocks, exposes investors to sector-specific risks, and might not always outperform the broader market.
Is the Dogs of the Dow strategy suitable for all investors?
This strategy is best suited for income-focused investors who are willing to accept a certain amount of risk. As the strategy involves investing in only ten stocks, it may not provide enough diversification for some investors. It’s always encouraged to speak with a financial advisor to discuss whether or not this investment strategy aligns with your risk tolerance and financial goals.
Related Entrepreneurship Terms
- Blue-Chip Stocks
- Dividend Yield
- Dow Jones Industrial Average (DJIA)
- Stock Market Strategy
- Portfolio Diversification
Sources for More Information
- Investopedia: A comprehensive resource offering a wealth of financial information and analysis, including detailed insights into the Dogs of the Dow strategy.
- CNBC: A leading source of finance news, offering in-depth articles and analysis about various investment strategies, including the Dogs of the Dow.
- Morningstar: A respected provider of independent investment research. They offer a variety of resources that may touch on the Dogs of the Dow strategy.
- The Motley Fool: An investing advice platform that also provides insightful analysis and discussions on various investing strategies, possibly including the Dogs of the Dow.
