Dogs of the Dow

Dogs of the Dow theory, used as an investment strategy, was first popularized by Michael O'Higgins in his book Beating the Dow, which was published back in 1992. The theory is based on the purchase of high dividend yield stocks that are members of the Dow Jones Industrial Average.

This concept is a great follow up to our article on dividend paying stocks, where we explain why certain companies pay higher dividends than others.  The term "dogs" refers to the fact these companies have somehow fallen out of favor with the investment community.

Dogs of the Dow Theory

The Dogs of the Dow Theory is really quite simple.  The Dow Jones Industrials is a prestigious list of blue chip stocks.  By sorting these stocks to find the ten companies with the highest dividend yield, you are automatically choosing companies that are undervalued relative to their peers.  By refreshing the list each year, you're always picking new "dogs."  These are the stocks that stand the greatest chance of catching up with their peers, thereby outperforming the DJIA.

O'Higgins examined the performance of the puppies by looking at the annual returns of these sets of stocks over a 17-year timeframe.  He compared the performance of a portfolio of ten stocks with that of the rest of the Industrials Index.  He found that the average annual return for the Dogs of the Dow was 17.9%, compared to 11.1% for the rest of the Dow.

To summarize, in this theory we have a combination of large cap stocks, paying high dividend yields, which seem to be undervalued relative to their peers.

Choosing the Dogs of the Dow

The way the process is supposed to work is that each year a new portfolio of stocks is chosen, using the closing price on the last day of trading for the previous year.  Some of the stocks might remain the same; some companies will be replaced by new dogs.

When you purchase this portfolio of stocks, you're supposed to allocate 10% of your investment dollars to each stock.  This means you will hold a different number of shares of each company's stock, since the market price will be different for each company.

Fortunately, several mutual fund companies have responded to the popularity of this investment strategy, and you can purchase mutual funds that follow the Dogs of the Dow Theory.

Recent Performance of the Dogs

In recent years, the performance of these canines have not faired quite as well as the time period examine by O'Higgins (1973 to 1989).  For example, they've only beaten the S&P 500 Index twice in the last five years.  In the same manner, the dogs have been outpaced by the Dow Jones Industrial Average in three out of the last five years.  Below is a table illustrating the relative performance of this group for the years 2000 through 2011.

Historical Performance:  Dogs of the Dow

This table demonstrates that 2011 was a good year for this group.  The Dogs of the Dow outpaced the DJIA by around 6.7%, and the S&P 500 by over 12%.

Dogs of the Dow Stocks

Now that you understand what the theory is all about, and we've given you some information on relative performance, it's time to share with you what you're probably looking for:  the Dogs of the Dow for 2012.  Remember, this list is based on the closing performance for 2011.  If you want to get in on this game, we're going to give you the ten companies you need to invest in for 2012.

We've been publishing this list for several years now, so for your reference, we've also included the Dogs of the Dow for 2012 through 2005.

Dogs of the Dow 2012

Dogs of the Dow 2011

Dogs of the Dow 2010

Dogs of the Dow 2009

Dogs of the Dow 2008

Dogs of the Dow 2007

Dogs of the Dow 2006

Dogs of the Dow 2005

Updated Dogs

Annually, we publish a new set of Dogs for the coming year.  To date we've published:

• Dogs of the Dow 2012
• Dogs of the Dow 2011
• Dogs of the Dow 2010
• Dogs of the Dow 2009
• Dogs of the Dow 2008
• Dogs of the Dow 2007
• Dogs of the Dow 2006

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