Category Archives: dog of the dow

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

Analyst Estimates: Dow Jones Industrial Average

Below are the price projections based on analyst earnings estimates for the Dow Jones Industrial Average as of October 22, 2016. These estimates project the price change for the respective stocks over the next 12 months and the risk profiles associated with the estimates.  We also propose a variation of the “Dogs of the Dow” theme for future analysis.

2016 Dogs of the TSX

In our most recent article on “Dogs of the Dow: A Look Back at 2015 & Forward to 2016”, we highlighted the stocks that are part of the Dow Jones Industrial Average that “…an investor annually select[s] for investment the ten Dow Jones Industrial Average stocks whose dividend is the highest fraction of their price [dividend yield] (wikipedia).”

Within the context of this concept, picking the ten highest yielding stocks of the Dow Jones Industrial Average, there is an important qualitative element that is implied by using the Dow.  Michael O’Higgins, author of the 1991 book Beating the Dow which outlined the idea later called “Dogs of the Dow”, said the following of the blue chip index:

“As the most popular indicator of market activity, the Dow is itself an influential barometer of the market and economic conditions. Individually, the 30 stocks that make up the Dow industrials are among the most widely held, widely analyzed, and widely publicized in the world. They are also among the biggest and the strongest. Combined, the 30 Dow components have assets of around 2.5 trillion dollars, nearly five million employees, and sales that exceed the gross national product of every country in the world except China, Germany, India, Japan and the United States.

“These prime companies may gain, lose, spin off, acquire, merge, rename themselves, reorganize, even drop out of the Dow, but they are an integral and vital part of our economic system, and in one form or another they are here to stay.

“The Dow companies and their products and services are household names to most people.”

The very fact that the companies from the Dow Industrials is limited to only 30 widely followed companies is what makes the concept “work”.  This strategy for investing gets extremely thin on performance when applied to the S&P 500 or any other “broad” index.  Part of the reason for this is the fact that some companies that are part of the S&P 500 Index aren’t at a “blue chip” status, yet.  Therefore, the whole point of using the Dow Jones Industrial Average is to isolate the best companies to invest in regardless of the market conditions.  Concerns regarding diversification are addressed here.

Understanding the above commentary about why the Dow Industrials are used, we are now going to apply the same concept to three different categories of stocks within the Toronto Stock Exchange Composite Index.

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