• The Dogs of the Dow is a strategy that focuses the 10 Dow Jones Industrial Average stocks with the highest dividend yields.
  • The strategy entails building a portfolio of these stocks and reallocating it once a year.
  • While it has had some measure of success, investors should be cautious around their level of risk and diversification.
  • Read more stories from Personal Finance Insider.

Dogs of the Dow is a relatively simple stock investing strategy intended to produce higher returns than the Dow Jones Industrial Average by focusing on the components in the equity gauge that have the highest dividend yields.

The strategy requires identifying those stocks and buying them at the end of a calendar year. Then, in one year’s time, you repeat the process, selling stocks that no longer meet the threshold and replacing them with ones that do.

How does the ‘Dogs of the Dow’ strategy work? 

The Dogs of the Dow was popularized in 1991 when Michael B. O’Higgins published his book, “Beating the Dow.” The term “dog” refers to stocks that have fallen out of favor. The strategy is to focus on the dogs, with the idea being that they’re near the bottom of their business cycles and are poised to bounce back.

To do this, the Dogs of the Dow strategy simply calls for owning a portfolio of the 10 Dow Jones Industrial Average stocks with the highest dividend yields and rebalancing it annually. This strategy remains popular today and usually garners media attention around January and December every year.

Dogs of the Dow concept and methodology

The members of the Dow are well-established, blue chip companies. But they are not immune to the normal business cycles of expansion and contraction. Where a company is in its

business cycle

can have a big impact on its stock price, which often peaks when it is at the top and troughs when it is near the bottom of the cycle.  

The Dogs of the Dow method uses

dividend yield

to identify which companies are in the contraction phase of the cycle to invest in now, with the hope of later selling for a profit during the expansion phase of the business cycle.

Dividends are payments made to shareholders of the company. Dividend yield is a measure of how much a company pays in dividends compared to its stock price, expressed as a percentage. If a company maintains a steady or increasing dividend, which many blue chips do, the dividend yield rises as the stock price falls.

“The underlying premise behind the strategy is mean reversion,” says Robert R. Johnson, professor of finance at the Heider College of Business at Creighton University. “The [Dogs of the Dow] is based on the theory that stocks can be over or undervalued, but over the long run those that are undervalued will ‘revert to the mean,'” says Johnson.  

dividend yield formula

Shayanne Gal/Business Insider

As with any investing tactic, there are some drawbacks. While the Dogs of the Dow has been shown to outperform the Dow average in certain periods, it performed noticeably worse during the financial crisis. In 2008, the blue-chip gauge lost 33.8% compared to the Dogs which was down 41.6%. There are also other downsides to consider.

“The challenge with this methodology is it focuses on only 10 companies, which is not a very diverse portfolio,” says Joseph M. Favorito CFP® professional and managing partner at Landmark Wealth Management. There are also tax implications to keep in mind. “It doesn’t take into account the tax impact of possibly turning over your entire portfolio should you attempt this in a non-retirement account without a tax shelter,” Favorito says.

Dogs of the Dow for 2022

The Dogs of the Dow for 2022 are calculated by taking the share price and dividend yield from December 31, 2021. Based on that date, these are the 2022 Dogs of the Dow. 

3 steps to executing the Dogs of the Dow strategy 

The Dogs of the Dow strategy can be in three steps: 

Step 1: Identify the 10 highest dividend-yield Dow stocks

On Dec. 31, start by pulling a list of the Dow 30 and rank each company according to its dividend yield. To obtain this list in just a few clicks, consider using a stock screener. 

Step 2: Invest evenly among the 10 dogs and hold for the year

On the first trading day of January, take the total amount that you’re investing and invest 10% into each of the 10 stocks. If you’re investing $10,000 then you would have $1,000 in each of the stocks. For a $500 total investment, just $50 per stock. 

Step 3: Reallocate your portfolio with Step 1 at the end of the year

After holding the stocks for a year, repeat the process by starting at step one and identifying which companies currently make the list. Next you will reallocate your portfolio by selling stocks that no longer appear on the list and replacing them with any new ones that do.

Depending on how the market performs, some stocks may remain a dog for a few years. Others may appear less often. One example is Verizon, which has appeared on the Dogs of the Dow each year since 2010. The company has only gained an average of 9.5% per year over that span.

Dogs of the Dow track record

Depending on the variation of the strategy, performance has been mixed in the last few years. On average since 2010, the Dogs of the Dow have had near-identical returns to the broader gauge.

“While they have produced similar returns over that 12-year period, some individual years have seen quite a divergence in performance,” says Johnson. “In 2020, for example, the DJIA gained 7.2% while the Dogs suffered a loss of 12.7%. The Dogs also underperformed in 2021, when the Dogs generated a return of 16.3% versus 20.8% for the DJIA,” he continued.

When comparing the Dogs of the Dow to the S&P 500 since 2010, the performance is also very similar with the Dogs returning an average of 13.6% per year compared to 13.9% per year for the S&P 500. 

It is important to note, however, that because of the lack of diversification in a Dogs of the Dow portfolio of 10 stocks, investors could be taking on significantly more risk versus a simple S&P 500

index fund

. While the concept of the Dogs of the Dow strategy is fundamentally sound, investors will need to carefully weigh the level of risk they’re willing to take versus their expected reward.


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