This Popular High-Yield Strategy Typically Beats the Market. It Didn’t this Year. And that Bodes Well for 2020.
Perhaps you’ve heard of the Dogs of the Dow strategy.
It couldn’t be more simple: at the beginning of the year, you invest in the 10 highest-yielding dividend stocks in the Dow Jones Industrial Average (which only has 30 stocks). Usually, it beats the performance in the Dow itself. Entering 2019, the Dogs of the Dow strategy had outperformed the Dow for four straight years and seven of the last 10.
But it won’t this year. It won’t even come close. As of this writing, this year’s 10 Dogs of the Dow are up an average of 13.5% (not including dividends), trailing the 21.4% return in the Dow Industrials and the 27% return in the S&P 500. In other words, you’d have been much better off just putting a lot of money in the indexes themselves.
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Here’s the thing, though. That 13.5% (with a couple weeks still to go) isn’t too shabby. In fact, it’s better than the average return in the Dogs of the Dow strategy (+9.5%) dating back to 2001. This has just been a very good year for the market—the Dow is on track for its fourth-best year since the turn of the century.
And the Dogs of the Dow is a conservative, safe strategy. It doesn’t normally produce monster gains, but it does typically produce positive results even when most stocks are down, like it did in 2018. That should come in more handy next year—the Dow hasn’t had back to back years of 20%-plus returns since the mid-1990s, and with a critical election coming and a possible recession on the horizon, it’s not likely to in 2020.
Mind you, I’m not saying that stocks are likely to tank next year. In fact, much of the evidence is to the contrary—despite U.S. stocks being at all-time highs, there are record outflows in equities, meaning most people aren’t buying in (or are preemptively selling stocks before the next market correction). Investor sentiment isn’t overly bullish. Growth stocks are a bit up and down. And a recession is far more rumor than truth; the U.S. economy is doing just fine at the moment.
My guess is, U.S. stocks will continue to climb in 2020. But not more than 20% again. And who knows what will happen with the presidential election next November and how people will react to either outcome. So it makes sense to hedge against a potential catastrophe not by preemptively selling stocks, but by buying a few reliable dividend stocks.
You could buy all 10 Dogs of the Dow. As of now, here are the 10 that would make the list, based on their yields:
Dogs of the Dow for 2020
Dow (DOW): 5.2% yield
Exxon Mobil (XOM): 5.0%
International Business Machines (IBM): 4.8%
Verizon Communications (VZ): 4.1%
Chevron (CVX): 4.0%
Pfizer (PFE): 3.8%
3M (MMM): 3.4%
Walgreens Boots Alliance (WBA): 3.2%
Cisco Systems (CSCO): 3.0%
Coca-Cola (KO): 2.9%
You could invest in all 10, or just take, say, the top half. The premise of the Dogs of the Dow strategy, after all, is that while blue-chip companies don’t alter their dividends much, the yields fluctuate based on the share price. When the share price is lower, the yield is higher. Thus, the Dow stocks with the highest yields are usually at or near their bottoms, and are due for a comeback.
So the higher the yield, the more likely they are to bounce back.
Bottom line: if you already subscribed to the Dogs of the Dow strategy, don’t give up on it based on one “bad” year. And if you had never heard of it until this writing, it’s a good place to look when searching for safer stocks to add to your portfolio that are likely to beat the market in 2020.
Investment analyst and Chief Analyst of Cabot Wealth Daily, Chris Preston brings you all the latest from the investing world. Sign up to get updates and breaking news delivered FREE to your inbox. Get unlimited access to our library of complimentary investing reports.Sign up now!