“Dogs of the Dow” is the name given to one of the simplest dividend strategies for beating the market. Over the coming year, I’ll track the Dogs’ performance and keep you abreast of news affecting these companies.
The Dogs is an investing strategy that buys and holds equal dollar amounts of the 10 best-yielding dividend stocks of the Dow Jones Industrial Average (INDEXDJX:.DJI). The strategy banks on the idea that blue-chip stocks with high yields are near the bottom of their business cycle and should do much better going forward. Investors in the strategy then would not only get large dividends but also gains in the stocks underlying those dividends.
High-yield portfolios are often dismissed as inferior to their growth counterparts for various reasons:
Many people fear that increasing dividend yields mean lower portfolio returns.
Others believe that dividend payments mean that management believes the business is done growing.
Evidence compiled by Tweedy Browne refutes these falsehoods. Research shows that portfolios of high-yield dividend stocks outperform lower-yielding portfolios and the market in general. In fact, a study by noted finance professor Jeremy Siegel found that over 45 years, the highest-yielding 20% of S&P 500 stocks outperformed the S&P 500 by three times! The highest-yielding stocks turned a $1,000 investment in 1957 into $462,750 by 2002, compared with $130,768 if the same money was invested in the index.
After beating the Dow by 6.8% in 2011, the Dogs of the Dow underperformed the Dow by 0.2% in 2012.
Check out the Dogs’ performance in 2013 so far:
|Company||Initial Yield||Initial Price||YTD Performance|
|Johnson & Johnson||3.48%||$70.10||17.98%|
|Dow Jones Industrial Average||13,104||11.15%|
|Dogs of the Dow||16.95%|
|Dogs Return vs. Dow (Percentage Points)||+5.8%|
This week, the Dow Jones Industrial Average was down 0.10%. The Dogs fell more than the Dow, moving down 0.87 percentage points. That brings the Dogs’ outperformance down to 5.8 percentage points better than the Dow.
The big news affecting the Dow this week was concerns over the strength of the U.S. jobs market. On Wednesday, ADP’s private-sector jobs report showed an addition of just 158,000 positions in March, down from 237,000 in February. Further poor news came the next day, when government-reported weekly new unemployment claims jumped to 385,000 from the previous week’s 357,000.
Investors went into Friday with low expectations for the government’s official jobs report, and it still came in far below those lowered estimates. The government reported U.S. jobs growth of just 88,000 jobs in March, down from 268,000 jobs added in February. Analysts had been expecting jobs growth of 190,000, so this was a big miss.