Dogs of the Dow Trading Strategy – Rules, Performance, and Backtest

Dogs Of The Dow (DOD)

Some investment strategies allow you to enjoy maximum dividend income, and Dogs of the Dow is one of such. But what does it really mean and how has it performed lately?

Dogs of the Dow Trading Strategy is a stock-picking strategy for selecting the highest dividend-paying Dow stocks. This investment strategy attempts to beat the Dow Jones Industrial Average (DJIA) each year by leaning portfolios toward high-yield investments. However, while it has outperformed until it was revealed, our backtests reveal that the Dogs Of The Dow strategy has underperformed compared to S&P 500 during the last couple of decades.

What are the Dogs of the Dow?

“Dogs of the Dow” is a stock-picking strategy for selecting the highest dividend-paying Dow stocks. The strategy attempts to beat the Dow Jones Industrial Average (DJIA) by investing in Dow component stocks with the highest dividend payout.

The idea is to allocate money to the 10 highest dividend-yielding, blue-chip stocks among the 30 components of the DJIA and then rebalance the portfolio at the beginning of each calendar year. That is, on the last trading day of the year, arranges the stocks in order of their dividend yield and invests equal dollar amounts in the 10 highest-yielding ones in the new year. The portfolio is held until the year when it is rebalanced to reflect the highest-yielding 10 stocks in the Dow Index. Rinse and repeat.

For example, the 2022 Dogs of the Dow are given in the table below:

	Ticker	Company	Dividend Yield
1	DOW	Dow	4.94%
2	VZ	Verizon	4.93%
3	IBM	IBM	4.91%4
4	CVX	Chevron	4.57%
5	WBA	Walgreens	3.66%
6	MRK	Merck	3.60%
7	AMGN	Amgen	3.45%
8	MMM	3M	3.33%
9	KO	Coca-Cola	2.84%
10	INTC	Intel	2.70%

While this strategy aims to get the best of the opportunities available in blue-chip dividend stocks, it doesn’t always outperform the average — in fact, it underperformed in 2021. Nonetheless, it has a solid long-term track record that appeals to many income investors. We look at the most recent performance further below in the post.

Who invented the DOD strategy?

The strategy first became popular in 1991 when Michael B. O’Higgins’ book, Beating the Dow, was published. In the book, O’Higgins coined the name “Dogs of the Dow” to explain the concept of investing in the top 10 Dow component stocks with the highest dividend yield.

However, the “Dow 10” theory has an older history. The concept first came up in 1951 in an article by H. G. Schneider published in The Journal of Finance. Schneider explained the idea of selecting stocks based on their price/earnings ratio. The concept also appeared in The Wall Street Journal in the early 1980s.

How can you invest in the Dogs of the Dow?

There are many ways to invest in the Dogs of the Dow. You can invest in individual stocks and build your own portfolio of the Dogs of the Dow. Alternatively, you can go through exchange-traded funds (ETFs) that invest in the stocks that make up the Dogs of the Dow. There is even a mutual fund that follows the DOD strategy.

Any method you choose is fine. The only difference is that buying the stocks individually might cost you more money and would req