A few summers ago I read the book called “Beating the Dow” by  Michael B. O’Higgins. He claimed that a simple stock picking strategy involving the thirty Dow Jones Industrial stocks could consistently outperform the market. The “Dogs of the Dow” strategy is to find the ten highest yielding components out of the thirty stocks. With that list of ten, you then choose the five lowest priced ones. With this list of five stocks, you have to wait at least one year to see good performance. The strategy assumes that the lowest priced stocks will not remain so for very long. This is because the Dow Jones Industrial Index of thirty companies represent ‘la crème de la crème’ of the market. Although companies like Walmart and McDonald’s are not monopolies, there is still something special and irreplaceable about these iconic American brands. As a result of the tremendous success of their past, the strategy assumes that any dip these stocks take, is most likely momentary and therefore a good buying opportunity.

Unfortunately the book was a little dated. The data it used was from the 1960’s to the 90’s. I was therefore curious as to whether the strategy would still hold up in the post-Great Recession era.

Performance by Year:

2013:

On December 31, 2013, the highest yielding, lowest priced stocks were Dow DuPont, GE, Intel, Pfizer and Hewlett-Packard. I listed their closing price as of that date. In the next column is the closing price, exactly one year later. I used the sum of the closes to find the total percent change of the entire cohort. In this case, had you bought one share of each, you would’ve had a 34% gain. The bottom chart compares this 34% gain with the  percent change of the S&P 500 and the Dow Industrial Index, over the same period. In 2013, the five ‘dog’ stocks outperformed both indexes by quite a bit.

2014:

2015:

2016:

2017:

Yearly Performance Chart:

As you can see, the ‘dogs of the dow’ outperformed the S&P and Dow three out of the five years. Interestingly, the dogs of the dow were able to show positive growth in 2015 even when the S&P and Dow declined in that year. The average yearly return (in these past 5 years) for the ‘dogs of the dow” is 15.2%, which is better than the S&P 500 ‘s 13.8% or the Dow’s 14% average yearly return.

If we look at the average yearly return, it’s clear the dogs still outperform the market. What I find interesting though, is that the dogs under-performed the S&P and Dow in the past two years (2016 and 2017). My hypothesis on this is that the recent growth in the market has been mainly attributed to the tech sector. Technology stocks have done extremely well lately and perhaps less capital has been allocated to stable blue-chip dividend stocks (such as those in the dogs of the dow) in favour of more speculative technology names.

Here is the excel file I used to compile the data:

DOGS_DOW