Category Archives: dog of NLO

The Intelligent Investor: 5-Year DJIA

Chapter 7 of The Intelligent Investor by Benjamin Graham offers up a “Portfolio Policy for the Enterprising Investors: The Positive Side.”  In this chapter, there is mention of “The Relatively Unpopular Large Company” which is essentially a Dogs of the Dow investment strategy.  Unlike the Dogs of the Dow, this approach does not focus on the highest yielding stocks in the Dow Jones Industrial Average.

The distinction of this strategy is the fact that it is based on the selection of the ten Dow Jones Industrial Average stocks with the lowest price to earnings (p/e) ratio.  This group is contrasted with the performance of the 10 highest p/e ratio stocks and the entire index.  The performance measures the price change over 5-year periods from 1937-1969 as shown below with our own 1-year comparison from November 4, 2016 to October 10, 2017.

Review: DJIA Analyst Review

In our posting of October 22, 2016, we highlighted the Analyst Estimates for the Dow Jones Industrial Average.  We took the analyst low estimated earnings and with a price to earnings ratio of 15 projected one year out. Below are the estimated returns and the actual returns as of September 29, 2017.


In our assessment of October 22, 2016, we had proposed the following outcomes to watch for:

  • “We believe that the average category provides the best return overall with the high risk group offering exceptional gains for aggressive investors who have a longer time horizon (3-7 years).”


In the category indicated as “high risk” the estimate by analysts suggested that the group would decline by more than –24.02%.  However, instead of falling, the high risk group has gained as much as +21.32%.  The “average return” group nearly doubled the expected return as determined by analysts.  Finally, the group indicated as “high expectations” gained half as much as the analysts had indicated based on the projected earnings with a price multiple of 15 times.

  • Our “NLO dogs” of the Dow would “…produce surprising numbers as compared to the way the conventional ‘dogs’  would perform .”


As outlined in the graph above, the projected return of the “NLO dogs” increased by +17.29% instead of declining –13.30%.  However, that exceptional reversal of fortune was not enough to meet our goal of the “NLO dogs” beating the traditional “Dogs of the Dow” investment strategy.


While there are three weeks remaining for the final 1-year numbers to come in, we’ve had some mixed results with our forecasts on expected returns.  Overall, the selection of companies in the most widely followed index should have similar outcome as outlined in 2016. 

Those stocks that are expected to perform the worst will exceed the prescribed returns while those expected to outperform will generally underperform analyst expectations.  We hope to follow up on the overall performance of the “high risk” group to see if the 3-7 year performance manages to hold up to our expectations.

Regarding the “Dogs” investment strategy, while it is nice for the stocks that we selected to exceed the performance of the analysts, the original theory seems to remain consistent, at least in the period from 2016 to 2017. 

Dogs of the Dow – A Look Back at 2016 & Forward to 2017

The term a "rising tide lifts all boats" was certainly fitting for 2016. The bull market raged on bringing most investment strategies, except for shorts, into the black.

One should expect to see a good deal of profits from the past "Dogs of the Dow" and "Dogs of NLO" strategy. We truly enjoy keeping track and assessing various strategies. What we did several years ago was introduced our readers to a strategy we termed "Dogs of NLO" which looked at the top 10 Dow Jones Industrial Average stocks that are closest to their yearly low. Contrast that to the conventional "Dogs of the Dow" which focus solely on the high yielding stocks.

Our argument is that these companies are typically clustered into several industries that has high payout ratio while leaving other companies out. As value investors, we put heavy focus on relative value versus absolute yield. That being said, we return to 2013 where we introduced the strategy.

To our surprise, the 10 companies in "Dogs of NLO" outperformed the traditional strategy by +16%. The average annual return for our strategy was +15.8% compared to 11.7%. The table below highlight the breakdown between price performance and yield-on-cost.


Dogs of the Dow 2013
Ticker Company Beginning of 2013 Price End of 2016 Price 2012 - 2016 % Chg Current Yield on Cost
T AT&T, Inc.         33.7         42.5 26.4% 5.8%
VZ Verizon         43.5         53.4 22.8% 5.3%
INTC Intel         20.5         36.3 76.8% 5.1%
MRK Merck         41.2         58.9 42.9% 4.6%
HPQ Hewlett-Packard         14.0         14.8 5.7% 3.8%
DD E. I. du Pont         45.1         73.4 62.9% 3.4%
PFE Pfizer Inc.         25.1         32.5 29.2% 5.1%
GE General Electric         20.7         31.6 52.7% 4.6%
JNJ Johnson & Johnson         70.1       115.2 64.4% 4.6%
MCD McDonald's         88.7       121.7 37.2% 4.2%
  Dog of the Dow Average   42.09% 4.65%
Dogs of the NLO 2013
Ticker Company Beginning of 2013 Price End of 2016 Price 2012 - 2016 % Chg Current Yield on Cost
MSFT Microsoft         27.0         62.1 130.5% 5.8%
MCD McDonald's         88.7       121.7 37.2% 4.2%
INTC Intel         20.5         36.3 76.8% 5.1%
DD E. I. du Pont         45.1         73.4 62.9% 3.4%
AA Alcoa         20.0         28.1 40.4% 1.8%
IBM IBM       192.7       166.0 -13.9% 2.9%
UNH UnitedHealth         54.4       160.0 194.0% 4.6%
KO Coca-Cola         36.4         41.5 13.8% 3.8%
MRK Merck         41.2         58.9 42.9% 4.6%
CAT Caterpillar         87.7         92.7 5.8% 3.5%
  Dog of the NLO Average   59.04% 3.97%

Although we would welcome +46.70% return of "Dogs of the Dow" strategy, we can't ignore the performance of our strategy which pulled in +63% total return.

One interesting observation was the relatively low dividend yield for "Dogs of NLO" in 2013 (2.90%) compared to the Dow (4%). However, by the end of this year, the yield for our strategy is not too far behind. We won't attempt to dissect the driver for this outperformance as it would be foolish for us to do so.

Now, let's explore the list published last year. The performance of our list was on par with the traditional strategy. There's only one way to find out the viability of this strategy and that's to revisit it several years from now.


Dogs of the Dow and NLO for 2017 Continue reading