What a year it was for the bull market in 2017, which naturally should have lifted all stocks and most asset classes. We've seen the rise in equities, real-estate, and new asset classes like crypto currencies. That being said, we'd take any opportunity to review strategies used in the market in an attempt to grow our assets. The start and end to the new year is a perfect stop to revisit a strategy known as the Dogs of the Dow.
In this piece, we're going to review the 2017 performance of the Dogs of the Dow and look back to the period of 1996 to 2017.
2017 Dogs of the Dow Performance Review
The purpose of any investment strategy is to exceed the performance of the stock market averages. In the year 2017, the Dow Jones Industrial Average gained +25.10%. The Dogs of the Dow, the 10 highest yielding stocks, gained +19.45%.
Knowing us, we can't leave well enough alone. We asked ourselves, how good is the highest dividend yield performance? To answer that question, we applied Charlie Munger's rule of "always invert" when confronted with a difficult question. So we ran the performance numbers of the 10 lowest dividend yielding stocks. One thing led to the another and we ended up with the following results.
Below is the performance table of the various fundamental attributes that we followed for the top 10 and top 3 ranked Dow stocks. As you can see, the top 10 low yielding stocks gained +27.33%, exceeding the top 10 high yielding stocks by 7.88%. More astoundingly, if you bought the top 3 low yielding stocks, you would have beat the top three high yielding stocks by +19.52%.
Looking at the performance of 2017, it could naturally be said that maybe the last year was a fluke. However, when looking at the average performance of the same categories since 1996, we find that the high yielding stocks managed to get beat out by the low yielding stocks, easily.
Of all the categories since 1996, the Dogs of the Dow (top ten highest yielding) was the worst performing metric by which to attempt to beat the Dow Jones Industrial Average. The two metrics that have beat the Dow over the period from 1996 to 2017 are the improbable high p/e and high p/b. We can't give an explanation for why these two approaches managed to do so well.
As a footnote to the last chart, to beat the Dow Jones Industrial Average by buying only the top three stocks, the best performers were (in descending order) high p/e, low yield and then the Dogs of the Dow. For some reason, the high p/e stocks beat the Dow in either the top ten or top three category.