In 1991, Michael B. O’Higgins published a book called “Beating the Dow.” It was in that book that O’Higgins introduced the world to a clever investment strategy called Dogs of the Dow.
With a name like that, you might expect the Dogs of the Dow Jones Industrials Index to simply be a bottom-fishing plan – just buy the ten worst Dow stocks and hold them for a year…
But O’Higgins defined “dogs” a little differently. Instead of simply picking the worst-performing stocks, the Dogs of the Dow targets the Dow Industrials stocks with the highest dividend yields.
There was a time when dividend payments were the main reason for owning a stock. Dividends are the backbone of compounding. There are plenty of stories like that of Warren Buffett who has owned shares of Coca-cola (KO) for so long, and the dividend has grown so big, that he now collects dividend checks that are equal to his initial investment…
As long-term wealth-building strategies go, you won’t do much better than a dividend strategy that reinvests dividends.
So, at its heart, Dogs of the Dow is a dividend strategy. But it also has a a bit of a trading angle, because it calls for switching out the stocks every year so that every January 1, you own the 10 Dow stocks with the highest yields.
Now, with stocks (just like with bonds), price moves inversely to yield. If you have a $10 stock that pays $1 in dividends a year, that’s a 10% yield. If the stock falls by a dollar to $9, that $1 dividend represents a yield of 11%.
It’s not always true, but often stocks that have high yields are stocks that have fallen in price but have not changed their dividend. Stocks with high dividend yields are sometimes considered to be risky. Think about why a stock falls in price – perhaps there’s some aspect of the business that is weakening. Perhaps that weakening could force the company to lower the dividend to conserve cash.
In this context, a dividend yield can be thought of as a bribe. How much income do investors demand to take on the risk of owning the stock?
The Dogs of the Dow
A quick scroll through the 10 Dow stocks with the highest dividend yields will give you some pretty mangey mutts. Verizon has the highest yield on the Dow at 7%. The stock was flat for 2024, which means all you got was the yield. In fact, the stock didn’t move higher in 2023 either.
Part of the problem for Verizon is debt. It is a $168 billion company with $178 billion in debt. That’s not very good, and it’s fairly easy for investors to imagine that it might have to cut its dividend at some point.
Second on the Dogs of the Dow list is Chevron and its 4.5% yield. Chevron finished 2024 right where it began, around $147 a share.
At third with a yield of 3.65%, Amgen (AMGN) was actually fairly decent for most of 2024. It had a 10% rally going until just after the election…
The next two are pharma stocks too, Johnson & Johnson (JNJ) and Merck (MRK). Both finished 2024 underwater largely thanks to sell-offs that started in October.
In the 5th slot, Coca-cola. KO was having a pretty decent 20% gain going in 2025, right up until that same late October-early November drop that took Amgen, Merck and J&J down.
Let’s think about the relatively high yields for these stocks in terms of risk. Do JNJ, MRK, AMGN and KO have anything in common?
I’m going to go out on a limb and say that the presence of RFK Jr. might have something to do with falling stock prices for three pharma stocks and the sugar drink company. Letting him “run wild” as the head of the FDA seems like a threat…
However, a strategy like Dogs of the Dow has the benefit of potentially getting you to buy stocks that have been unfairly punished (after all Dow stocks are thought of as blue chips). The likelihood that RFK’s bark is worse than his bite could mean some decent upside for these dogs.
What About the Zero Dividends?
By definition, the Dogs of the Dow rules out any stock on the Dow Industrials that doesn’t pay a dividend. There are two. One is Amazon (AMZN). I suppose Amazon could surprise us one day with a dividend, maybe in a couple years after they pour $100 billion or more into their AI strategy. I’m not holding my breath.
The other Dow stock that doesn’t pay a dividend is: Boeing (BA). Yes, Boeing is a perfect example of a company where things got so bad they had to cancel the dividend payment. Not good. But then, these are the dogs we’re talking about…
If Boeing reinstated its dividend at the 5-year average of 2.48%, it would be #9 on the Dogs of the Dow list, right between Cisco (CSCO) and McDonald’s (MCD).
I’m sure we’re all pretty well aware of Boeing’s problems. At some point, the story will get better for Boeing. Now I can’t tell you when that will be. But have you heard anyone say anything good about Boeing in the last 12 months? Probably not…
Sentiment remains terrible for Boeing, even though it is ramping production back up after the machinist strike in November. That disconnect could spell opportunity for Boing shares in 2025.
Cheers,
Briton Ryle
Chief Investment Strategist
Outsider Club
X/Twitter: https://twitter.com/BritonRyle
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