Dogs of the Dow: December 2018

The results for our Dogs of the Dow for 2018 are almost in.  In this posting, we will summarize our findings of the data that we analyzed on the Dogs of the Dow from 1996 to 2017.  We will demonstrate our “skin in the game” by checking the performance of the stocks that we actually bought based on our assessment.  Finally, you get to see the data we used and correct us on our errors.

What are the “Dogs of the Dow?”

According to Wikipedia, the Dogs of the Dow, “…is an investment strategy popularized by Michael B. O'Higgins in 1991, which proposes that an investor annually select for investment the ten Dow Jones Industrial Average (DJIA) stocks whose dividend is the highest fraction of their price [highest dividend yield].”

The strategy is to rank the Dow Jones Industrial Average by dividend yield and select 10 of the 30 stocks to hold for one year.  After one year, sell the stocks you held in the previous year and buy the next set of highest yielding stocks.

Our Review of the Data

In the period from November 2017 to December 2017, we poured over the available data on the "Dogs of the Dow.  Our interpretation of the data counters all that the Dogs of the Dow stands for.

First and foremost is the view that stocks with a high dividend yield would beat the Dow Jones Industrial Average.  Yes, high yield dividend stocks did beat the Dow Jones Industrial Average in many years from 1996 to 2017.  However, the years that the Dogs of the Dow didn’t beat the index resulted in subpar average annual returns.

When selected for the top ten stocks with the highest dividend yield, the Dogs of the Dow generated the worst average annual return from 1996-2017 as compared to other fundamental categories.

When broken down to the top three stocks, our favored method on the theme, the Dogs of the Dow generated gains exceeding the Dow Jones Industrial Average.  However, the high yield approach could not exceed the gains of taking the opposite approach by choosing the top three stocks with the lowest dividend yield.

By the end of year 2017, we came away with the following highlights that should be considered when attempting the Dogs of the Dow strategy using either ten stocks or three stocks (our favored approach):

• High yield equals high risk, even within blue chip category.
• Fewer stocks means greater volatility.
• Low yield DJIA stocks track momentum performance, exceptional reward with exceptional risk.
• If you want “average” performance buy the index fund.
• If you want exceptional return with more risk, buy the 2nd, 3th and 4th ranked stocks among the high p/e or low yield stocks.

Skin in the Game

While we talk a lot of game, there is no substitute for action.  After analyzing the data and arriving at the conclusions listed above, we took the following actions on January 2, 2018:

• We established a long position in Merck (MRK) at 6.65% of the portfolio
• We established a long position in Coca-Cola (KO) at 6.65% of the portfolio
• We established a long position in Caterpillar (CAT) at 6.65% of the portfolio

Since January 2, 2018, the above three stocks have had mixed results.  However, as a group, the average change by December 7, 2018 has been +7.25%.  Our gain has exceeded the Dow Jones Industrial Average change of –1.34% over the same period of time.

Data Dump

Below is the data for the year 2018 related to the Dogs of the Dow.

The above chart shows the staggering gains achieved by the high p/e ratio and low dividend yield stocks as outlined in our work from 1996 to 2017. Worse still is the outsized gain of the “top 2,3,4 high p/e” stocks.

What follows is the starting/ending price from December 29, 2017 to December 7, 2018.  Please let us know when see and error.  We’d like to reflect the data as accurately as possible.