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Articles from The Prudent Investor

Dividend Investing Strategies – Dogs of the DOW Variations

by George L Smyth

Dogs of the DOW is a dividend investing strategy that has held up over time.  There are many published variations of this strategy, some that outperform and others that do not.  I also have an idea to consideration for improvement.


Investing strategies that are successful get attention (and the ones that are not are derided).  Successful strategies get examined to see whether or not improvements can be made.  This is certainly the case with the Dogs of the DOW.  For your scrutiny I will offer several strategy alterations that have been tested and one untested model that I am thinking may work.

Small Dogs of the DOW

To quickly review the Dogs of the DOW strategy, the idea is to purchase in equal amounts the ten companies within the DOW that have the highest dividend yield on the last trading day of the year.  You can read more in-depth at Dividend Investing Strategies – Dogs of the DOW.

Small Dogs of the DOW uses the premise of the idea and reduces the number of companies that eventually make it into the portfolio.  On the last trading day of the year one selects the Dogs, then from those companies the five with the lowest stock price are selected.

Dogs of the DOW is a simple strategy and Small Dogs of the DOW is almost as simple, which is a complaint I continue to hear.  Then again, merely buying an S&P 500 index fund is as simple as it gets, yet most mutual fund managers are unable to beat it.  So if a simple strategy can do what most professionals who are paid to invest other people’s money cannot then it should be a possibility for inclusion in one’s portfolio.

Below is a comparison of the Dogs, Small Dogs, and the S&P 500.

Investment 5 Year 10 Year 20 Year
Dogs of the Dow 13.4% 15.9% 9.5%
Small Dogs of the Dow 9.6% 14.9% 10.0%
S&P 500 12.5% 14.2% 7.7%

Comparisons in the 15-20 year range are helpful because over the past 15 years we have seen both the biggest financial crisis since World War II and the longest bull market in history.  This means that a strategy with such a history has seen the best and worst of times, so it is not dependent upon a specific market direction.  Strategies that only work during bull or bear markets are not helpful when the opposite occurs.

In this case, the shorter histories of the Small Dogs that include only a rising market do not perform as well as the Dogs or S&P 500.  However, mix in the financial crisis of 2008 and it slightly outperforms both.  Like its larger version, there are years of underperformance and years of outperformance. 

To my mind, the differences between the Dogs and Small Dogs are not significant enough to consider.  However, since the strategy works with a smaller number of companies, it may be of greater appeal to the small investor who does not wish to hold a large number of stocks.

Foolish Four

The Foolish Four was a strategy offered by the Motley Fool.  I refer to it in the past tense because they no longer endorse it.  In the past, they have abandoned successful strategies, but the inclusion of the strategy in this article is more of a cautionary tale.  Warren Buffett explained that he only wanted to invest in companies that he understood, and similarly, we should only employ strategies that we not only understand but also make sense to us.

At this point I will disclose that years ago I wrote a weekly column for The Motley Fool, concentrating on dividend reinvestment programs.  To some degree, I had a fondness for the website, but I recognize that at times problems can arise when backtesting and data mining get in the way of reasoned approaches.

The original location of the idea for the Foolish Four no longer exists, as the explanation of the strategy is no longer on their server.  All descriptions come secondhand and it appears that the strategy changed several times over the years.  The simplest explanation I found was to select the Small Dogs, remove the one with the lowest price, and place 40% of the investment into the second lowest-priced stock, with 20% each in the third, fourth and fifth-lowest. 

There is also an alternative description, which probably follows an alteration they had made to the original strategy, where one picks the five Dow stocks with the highest ratio of yield to the square root of the stock price, then drops the one with the highest ratio and buys the second through fifth highest.  The author then emphasizes that he is not actually making this up.

Looking at the changes to the strategy it seems to me that they found a thread in backtesting and built a strategy based on that thread.  I believe that when the strategy stopped working they continued backtesting in an attempt to justify it, which led to absurdity to the point where they felt the need to erase it from memory.

Much better would have been to leave the pages that explained the strategy intact, and offer a section on lessons learned.  I spent many of my younger years in denial and it was not until I decided to take ownership of what I did that I “grew up.”  After all, we respect those who admit their mistakes and offering an explanation of the mistake would have helped the rest of us learn.  Outside of old posts on their message boards, the website is mostly silent on the strategy.  As a chess player, I understand that we learn more from our failures than we do from our successes.

Dogs of the DOW X

The official Dogs of the DOW website’s mission has been to improve on the Dogs of the DOW strategy.  It offers a trove of information about it, including historical data going back to 1996 as well as information about current Dogs.

Their idea was to determine whether or not there was anything special about the number ten – the number of stocks selected for the portfolio.  The Dogs strategy has the investor select ten companies but what is the significance of the number ten?  Would a number other than ten make for a better portfolio?  More?  Less?

According to the website the answer is “Yes,” a better number of stocks in which one should invest using the Dogs of the DOW strategy is seven, and the number for those following the Small Dogs of the DOW is three.  The reason the letter "X" is used is that the author wants the flexibility to adjust this number as additional information is obtained.

Over the years this reduction in the number of stocks has outperformed not only the S&P 500 but also the Dogs and Small Dogs.  Below is a chart with comparisons.

Investment 5 Year 10 Year 20 Year
Dogs of the Dow 13.4% 15.9% 9.5%
Dogs of the Dow X 15.6% 17.7% 10.8%
Small Dogs of the Dow 9.6% 14.9% 10.0%
Small Dogs of the Dow X 14.3% 19.7% 12.5%
S&P 500 12.5% 14.2% 7.7%

This is impressive and notable.  I am not a fan of holding a large number of individual companies, as the majority of my portfolio has been invested in index funds.  I am more attuned to buying and holding until I either need the money or feel that a particular investment is no longer serving me, so the idea of selling just because a date has arrived is anathema to me.  However, allotting a small number of stocks to this idea makes sense for consideration.

Of course, as is the case with the Dogs, there will be years when the strategy will underperform, so if one heads down this path they should do so accepting that it is a long term approach.

InvestMete Dogs

The general idea of the Dogs of the DOW is to have a mechanical means of selecting beaten-down stocks and buying and selling them at a specific time.  The companies in the DOW are large and respected, and in the world of "should,” the ones that are currently having problems should rebound.  Dividend yield is one means of identifying companies within the DOW that are unloved and will hopefully recover in the future.

However, isn’t stock price also itself a means of doing this?  Perhaps it is a more direct means of identifying problem companies.  I do not refer to the price of a stock in isolation, but the price relative to its 52-week high and low.  If its value is near its high then it is certainly doing well, but if it is near its low then it is not performing as well as it had been.  Perhaps selecting a certain number of companies from the DOW that are closer to their 52-week low than their 52-week high might make sense.

I wrote an article about the InvestMete strategy and long ago it survived my backtesting.  I used the idea for about 15 years to determine how much to send to companies in my dividend reinvestment portfolio and that was successful for me, so I am very comfortable with it.  How well the strategy works for companies in the DOW and how many companies should be included within the portfolio is an idea for anyone willing to backtest.  Yes, this goes outside the arena of dividend investing, but none of us should be putting all of our coins into a single pot.

InvestMete is both not just strategy but also a program that will do all of the math for you, so there is no need to gather information and make 30 calculations.  To run the program, enter all of the components of the DOW (AWR DOV NWN EMR GPC PG PH MMM CINF JNJ KO LANC LOW FMCB CL NDSN HRL TR ABM CWT FRT SCL SJW SWK TGT CBSH MO SYY) into the Tickers field, and enter any number for the Amount.  It will take a bit of time (I have to screen scrape for the price information) but eventually a table will appear of InvestMete information for all companies. 

Click the InvestMete table heading twice to sort for the highest InvestMete amounts.  The companies at the top are closer to their 52-week lows than the other companies.  The idea would be to purchase stock from the top listings, with the assumption that they will improve over a year.

How many companies should be chosen?  Is one year the proper timeframe?  I will let someone else try to figure these things out, but the general approach makes sense to me.

Finishing Up

The Dogs of the DOW is a successful strategy for dividend investors who are seeking to outperform the S&P 500.  It is a cross between one who has a buy and hold philosophy and one who would like to be more active with their portfolio.  Only a long term dividend investor thinks of buying and selling once a year to be “active.” 

The Dogs of the DOW X and Small Dogs of the DOW X appear to outperform this strategy, and the fewer the number of holdings may be more palatable to the small investor.  The original strategy is solid, as are some alternatives to this original idea, so one should consider their perspective and determine if one of these strategies is a proper fit. 

Other Articles of Interest


Dividend Investing Strategies – Dollar Cost Averaging

Dividend Investing Strategies – Dividend Growth


Dividend Investing Strategies – Dogs of the DOW

by George L Smyth

Dogs of the DOW is a dividend investing strategy that has shown itself to hold up over time, comparing well against the S&P 500 and DJI benchmarks.

When I was five years old I went to the dog pound with my father.  I remember selecting one we called Lady (after the movie we had just seen, “Lady and The Tramp”) and she was my best friend for the next 17 years.  Why is it that we have so many pejorative phrases for dogs?  ‘dirty dog’, ‘gone to the dogs’,  ‘sick as a dog’ – I'm just not sure how "dog" can have a negative connotation, but I'm straying.

Dogs of the DOW identifies the beaten down, problematic, downtrodden companies within the DOW.  Referring to them as dogs, they are the ones that nobody wants and have been punished as a result.  With redemption in mind, another descriptive phrase comes to mind - 'every dog has its day'.

The Dogs of the DOW strategy was popularized in 1991 by Michael Higgins and works on the premise that members of the DOW are strong companies and the ones that are currently having difficulties will rebound.  The idea is that purchasing a group of hurting and unloved stocks at a time when their price is low will result in a profitable investment when the share price returns.

This is a buy low / sell high strategy that quantifies what is considered low.  It is a mechanical means of selection and timing that takes judgment away from the investor, grouping companies based on specific numbers and making trades on specific days.  The strategy has its critics, but its results over the years have shown that this is a successful strategy for the patient investor.

Some History

The DOW contains 30 companies selected by editors at The Wall Street Journal.  The original list, created in 1896 by Charles Dow contained 12 companies that he felt offered a good picture of the American industry (thus the inclusion of the word “Industrial” in the Dow Jones Industrial Average).  Over time the number of companies increased to 30, and as some companies became weaker they were removed and replaced by companies deemed to more appropriately reflect the goals of the index.  General Electric is the only company that remains from the original 12.

There is no formula for inclusion in the DOW.  They are large, stable and respected companies, but no actual rules dictate a company’s inclusion or exclusion.

The Strategy

The idea of the strategy is to purchase in equal amounts the ten companies within the DOW that have the highest dividend yield on the last trading day of the year.  That's it.  Companies that are already owned are held, companies that are currently held and are no longer in the group of ten highest yielding companies are sold.

This sounds quite simplistic and the strategy has gotten pushback because of that, but to coin yet another phrase, ‘the proof is in the pudding’.  Regardless of opinion, the bottom line is the results, and they are positive.  With the assumption that dividends are reinvested, according to the official Dogs of the DOW website below is a comparison of the average total returns against the Dow Jones Industrials.

Investment 5 Year 10 Year 20 Year
Dogs of the Dow 13.4% 14.9% 10.0%
Dow Jones Industrials 13.3% 13.9% 8.4%

It makes sense to compare this strategy against The DOW, the most commonly referenced benchmark in the world.  After all, this is a selection specifically of DOW companies and its purpose is to improve on the group’s performance.  I note that the longer the strategy is employed, the greater the difference in results between the strategy and the benchmark.

However, I have been comparing previous (and will continue to compare) strategies against the S&P 500.  If a strategy is not able to beat the S&P 500 then it is better to simply invest in a low expense ratio S&P 500 index fund or ETF.  Below is a comparison of the Dogs against the S&P 500.

Investment 5 Year 10 Year 20 Year
Dogs of the Dow 13.4%



S&P 500 12.5%



This is still a favorable comparison.  Had it not measured up then I would not have offered it as an option (as has been the case with some other strategies I have examined, like the dividend hedging strategy, which has an unimpressive 5-year return of -7.8% and a 10-year return of -8.0%).

When I first heard of this strategy I was intrigued.  The problem was that in the 1990s discount brokers charged (at best) around $15 per trade.  This meant that $150 in commissions would have been lost just getting started, and perhaps an equal amount each year to sell companies not in the new list and purchase newcomers.  As I've always felt that one should lose no more than 1% to fees, this means it would have cost $15,000 to get started, which was a non-starter for me.

Today discount brokers, like Ally and E*Trade, offer trades without cost, so that restriction is no longer relevant.  Purchasing ten companies is now within the realm of the small investor since the 1% rule can be accommodated.  For $1,000 one could conceivably purchase $100 of stock of each of the ten companies, but that is hypothetical, not practical.  Alas, share prices for three of the ten companies are over $100, so the lower the amount invested, the more difficulty there is buying equal amounts of each company.

I suggest one slight alteration to the current strategy if one decides to follow it as offered.  If a company has seen gains and is not to be carried over to the next year then I would recommend waiting to sell it for one day.  This is to ensure those gains are seen as long term as opposed to short term so that they receive a favorable tax status.

There Could Be Problems

This is a long term strategy.  When working with a long term strategy we must have the correct mindset and realize that short term considerations can interfere with the process.  There have been years this strategy has underperformed, so it will not show positive results every year.

Four of the five years between 2005 and 2009, which included a major recession, the strategy greatly underperformed the DOW.  This was also the case last year.  It has also underperformed when stocks have had their best years, like during the dot-com boom.  So while some investors were making large sums of money, the Dogs did not offer as large windfalls. 

Over the long haul Dogs of the DOW is a strong contender for a long term investment strategy that one should consider.  However, there could be major bumps in the road, and one should be willing to wait out extended periods of underperformance.  But isn’t this the case with many long term strategies?  If one is comfortable with these shortcomings then this is a workable strategy.

Thinking Out Loud

A question I have had has been about the date selected for adding and dropping companies.  It makes sense that the last trading day of the year is a convenient time to make these changes, but what if, for instance, the last trading day in June was the day to update the portfolio?

This may sound like an amusing “so what?” question, but ever since reading Outliers by Malcolm Gladwell, ideas like this come to mind.  He showed that children born early in the year had a better chance to become professional hockey players than those born later in the year (sounds weird, but read the book).

In the past backtesting this sort of thing would have been impractical.  But it seems to me that anyone with programming abilities and access to big data should be able to find the result.  My guess is that some days might test better, but would not do so in a meaningful way.

On the other hand, there are certain times of the year that are influential when investing in the markets.  Sell in May and Go Away is a well-known phrase.  Though perhaps not relevant now, for many years this was a seasonal pattern that occurred every year.  There is also the Santa Claus Rally, which references a seasonal occurrence.

Almost certainly the last trading day of the year was selected for the sake of convenience.  This is the traditional time to reconsider one’s investments and make portfolio mixture adjustments.  But my sense of curiosity makes me wonder about the timing.

I also wonder about the one-year timeframe.  Certainly is adds simplicity to the strategy, but would a holding time of six months be more profitable?  How about two years?  Longer?

While I know of no backtest to answer these questions there have been improvements to the strategy that I will investigate in a future article.

Finishing Up

Dogs of the DOW is a successful strategy for the dividend investor who wishes to outperform the S&P 500.  It is a long term strategy that requires patience and dedication, as it probably will not perform as well during times of great volatility.  But for those who have the patience and mindset, which are terms that describe the long term dividend investor, this strategy is a proper portfolio consideration.

Other Articles of Interest

Understanding Dividend Yield

Dividend Investing Strategies – Dollar Cost Averaging

Dividend Investing Strategies – Dividend Growth


This website is maintained by George L Smyth