A New Approach to Dividend Investing: Breaking Down the Dogs of the Dow

There’s a popular investing strategy that has gained traction among dividend hungry investors over the years. Known as the “Dogs of the Dow,” this approach, popularized by investor Michael O’Higgins in the early 1990s, aims to capture both cash payouts and price appreciation. The idea is simple: at the beginning of each year, investors buy the 10 highest-dividend yielding members of the Dow Jones Industrial Average and see if these stocks can outperform the broader market.

The Dogs of the Dow strategy is based on a solid theoretical foundation. Since the Dow is composed of well-established companies, the strategy generally tilts towards high-quality stocks. Additionally, by focusing on dividend yield, which often rises when stock prices fall, investors following this strategy could potentially buy undervalued stocks that are primed for a rebound. Kevin Simpson, founder and chief investment officer at Capital Wealth Planning, suggests that 2024 may be a particularly favorable year for this strategy due to the expected rate cuts by the Federal Reserve, which tend to benefit stocks with healthy dividend yields.

While the Dogs of the Dow strategy has delivered positive results in the past, it does not guarantee success every year. In 2022, when equity markets declined, the Dogs outperformed the broader market. However, in 2023, a group referred to as the “Magnificent 7” led the market higher, causing the Dogs of the Dow to underperform the S&P 500. As of Friday, an equal weighted portfolio of the Dogs of the Dow would have yielded a modest total return of just 6.7% for the year, lagging behind the full Dow and significantly trailing the S&P 500 and Nasdaq Composite.

Given the underperformance of the Dogs of the Dow in 2023, it comes as no surprise that only two of the current members are projected to remain in the top 10 dividend yields for 2024. JPMorgan and Intel are likely to be replaced by Coca-Cola and Goldman Sachs. However, it is important to note that the list is subject to change by the end of the year.

Investors need not strictly adhere to the Dogs of the Dow theory by purchasing all 10 recommended stocks. It is possible to capture the essence of the strategy by selecting a subset of the list. Kevin Simpson, for instance, currently owns six of the ten names on the preliminary 2024 list, including Coca-Cola, IBM, and Verizon. He highlights Verizon as a stock that has shown signs of stabilization after a turbulent period and is improving its fundamentals. With significant investments in 5G technology and efforts to streamline their balance sheet, Verizon’s management has positioned the company for future success.

While the Dogs of the Dow strategy can be enticing and carry the potential for strong returns, it is always essential to consider the fundamentals of the individual companies being considered. Simplifying investment decisions based solely on dividend yield may overlook critical factors that affect an organization’s long-term viability and growth potential. Investors must carefully analyze each stock within the strategy, assessing the company’s financial health, market position, and overall outlook.

As dividend investing continues to attract attention from income-oriented investors, the Dogs of the Dow strategy remains an intriguing option. However, it is crucial for investors to conduct thorough due diligence and consider a broader range of factors beyond dividend yield alone. By combining well-established dividend payers with careful analysis and a diversified investment approach, investors can increase their chances of achieving both income and capital appreciation in their portfolios.

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