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A popular investment strategy that focuses on buying the highest-yielding stocks from a selection of blue-chip stocks each year has proven to be a long-term winner. This year’s dogs look ready to hit the ground running.
by John DobosForbes staff
Like ancient metallurgist Similar to those who sought ways to turn base metals into gold, stock market investors are always on the lookout for formulas and guides that will reliably generate positive investment returns and give them an edge over the market. Occam’s razor principle suggests that solutions involving fewer variables are preferable to solutions that require more input. The simpler the better, because getting the job done with just a few moving parts poses less risk of disruption or failure than a highly complex system.
If you’re looking for reliability and simplicity when investing in the stock market, it’s hard to beat the dogs of the Dow. This investment strategy calls for buying equal amounts of each of the 10 highest-yielding Dow Jones Industrial Average stocks at the start of the new year. After holding these stocks for 12 months, rebalance your portfolio to the 10 stocks with the highest dividend yield after a year and repeat this process every year. The idea is to grab good companies during a temporary period of bad luck and undervalued prices, and receive dividends while waiting for an eventual recovery.
“Historically, dividends have been about half of a stock’s total return, and while dividends have been very stable, stock prices have been volatile,” he wrote in his book 33 years ago. said Michael O’Higgins, a Miami-based wealth manager who made the announcement. break the dowHowever, the nickname “Dog” was coined by Andrew Barry in the late 1990s. Barons.
Michael O’Higgins first articulated the Dow dog strategy in his 1991 book Beating The Dow.
Michael O’Higgins
“If a company is still paying dividends, it means they have the money to pay the dividends. And they usually turn around, because one of the things that happens to troubled companies is that new management It’s because the team comes in and cleans the office,” says O’ Higgins, 76. Another reason they recover is simply because the world is cyclical, and downcycles are inevitably followed by upcycles. ”
While the Dow’s dog strategy has proven its mettle, it has experienced its own cyclicality. It has underperformed the stock market as a whole, like last year’s wild bull market or 1999, when the dot-com bubble ballooned to unsustainable proportions. It tends to outperform during bear markets like 2022 and large bear markets like 1972-1974 and 2000-2002.
Major banks like Citigroup, Bank of America, and JPMorgan Chase were on the verge of bankruptcy before the federal government came to their rescue, as was moribund General Electric, and the Dow Jones Industrial Average in 2007. fell behind the overall market. -Although it fell into a bear market in 2009, bank dividends that had been suspended due to the financial crisis were reinstated and financial stocks revived, resulting in the stock outperforming the Dow average for seven consecutive years from 2010 to 2016. More recently, the Dow 10 has outperformed the Dow Jones Industrial Average only twice in the past seven years, as interest rates hit rock bottom and fueled strong gains in growth stocks, especially in the technology sector such as Apple and Microsoft. But with bond yields well above where they were a few years ago, the tailwind for tech could be short-lived.
“There are cycles and fads that come and go in the investment world, and what works tends to continue to work for a while until it goes too far,” says the company, which manages $160 million in assets. says O’Higgins. “I like to buy cheap, and the stocks I buy have problems and are in trouble, but I really don’t buy them when there are no problems and when prices are abnormally high.” Do you want to?”
For more than half a century, the dogs of the Dow have made a convincing case that using dividend yield to measure the value of blue-chip stocks is a superior breeding strategy for long-term success. I did. With annual rebalancing and dividend reinvestment, the dogs of the Dow through December 31, 2023 have generated a cumulative total return of 45,340% since 1972. This is more than double his cumulative return of 21,459% for the Dow, and 20,254% for the S&P 500. same time zone.
A subset of five stocks performed even better. The “small dogs of the Dow” are his five stocks with the lowest prices out of all 10 stocks. Since 1972, the small dog has produced a cumulative total return of 81,752%, and annualized to the end of 2023 he was 13.77%. This compares to an annualized rate of 10.89% for the 12.49% Dow Dogs, 10.89% for the Dow 30, and 10.76% for the S&P 500.
“Stocks with lower dollar prices are more volatile, and you’re buying stocks that are falling in price and compressed in value, so it’s like a spring, if you push the stock down, if you push it down further, it will bounce back up.”More ” says O’Higgins. “A quarter-point increase in a $10 stock is much larger than that in a $100 stock, so if you’re going to outperform, you’re going to outperform more in lower dollar-sized stocks.”
Dowdog beats the market
Long-term returns have significantly outperformed the Dow and S&P 500.
Mr. O’Higgins was born in Venezuela to a Cuban mother and an Irish father who met at a high school prom in Philadelphia, and was introduced to Dow’s dog strategy while working in institutional research at Spencer Trask & Co. in New York. came up with. Bank. He noticed that wealthy investors and their advisors strongly preferred blue-chip stocks included in the Dow Jones Industrial Average, a venerable index constructed to represent the largest and most important companies in the U.S. economy. Ta.
“The trust divisions of these banks all had lists of stocks that their investment committees authorized them to purchase. And this particular bank, Richland Trust Company of Mansfield, Ohio, had 30 stocks. And they said, “Oh, this is the Dow.” And we think you can simplify your life by just focusing on these 30 stocks,” O’Higgins said. Masu. “This stuck with me, and I believed you could do better. So I started researching and came up with some strategies that worked. But the best strategy is the one with the highest payout. Of the 10 companies that paid money, these were the five with the lowest dollar prices.” Dow, so I ran with it. ”
Value investors are traditionally attracted to stocks that trade at below-average price-to-earnings ratios when compared to the overall market or the stock’s own history, due to the somewhat subjective nature of reported earnings. Because it’s the nature of it and how it distorts economic value. O’Higgins prefers to focus on dividend yield as a criterion for valuing a company.
“Earnings are what the accountants say they are, so they can be manipulated,” O’Higgins says. “They can make companies that aren’t profitable look like they’re profitable, and Enron is an extreme example of that. But with cash dividends, a $1.00 dividend becomes a $2.00 dividend. No one can say that it is.”
Dividend cuts are rare, but not unheard of among the Dow Jones Industrial Average. The dogs of the Dow aren’t immune to dividend cuts either.This month only, the current Dowdog walgreens (WBA) raised its dividend by 48% from a quarterly rate of $0.48 to $0.25 per share.
Despite the stigma of giving shareholders a pay cut, a reduced dividend is not an automatic death sentence for a stock. On the other hand, it may also be a buy signal. intel (INTC), a Dow dog alumnus and last year’s member, doubled its value by the end of 2023 after cutting its dividend by two-thirds in late February.
“Generally speaking, by the time a company cuts its dividend, it’s old news,” O’Higgins says. “There is a saying in the market that you buy the rumor and sell the news, but the opposite is also true, and historically, now is very often the time to buy.”
While dividends are central to the Dow’s dog strategy, stock buybacks are another way companies return cash to shareholders. While satisfied with Dog’s long-term track record, O’Higgins said it’s important to focus on the broader concept of shareholder return (dividends + share buybacks + net debt service divided by market value). This would be an improvement to the strategy that we believe would be useful.
“There are a lot of share buybacks going on, and some people believe that these buybacks are a type of dividend, just another way to return capital.”
Below is a ranking of the current dogs of the Dow in descending order of stock price. His first five stocks on the table are the small dogs of the Dow. In addition to each stock, there are also billionaire investors who report holdings in the stock in their most recent Form 13-F filings with the U.S. Securities and Exchange Commission.
2024 Dow Dog
These 10 stocks are owned by billionaire investors and have the highest dividend yields in the Dow Jones Industrial Average.
With an average dividend yield of 4.2% as of January 11, 2024, the dogs of the Dow have produced investment returns that are 133% more than the Dow average and 186% more than the S&P 500 index on an annual basis. This dog offers exposure to 7 of the market’s 11 sectors and has an average P/E of 14.7, significantly lower than the S&P 500’s P/E of 21.6 and the Dow Jones Industrial Average’s P/E of 26.7.
Regarding the relative trade-off between bonds and stocks, O’Higgins said inflation tends to be higher over the long term than the U.S. has experienced over the past 30 years, which is typically harmful for bonds but not for stocks. observed to be beneficial.
“We’re clearly in an inflationary cycle, which is bad for bonds but good for stocks and precious metals,” O’Higgins says. “As long as there is a free market, businesses can adapt to any situation, but bonds cannot.”
John Dobos is the editor Forbes Dividend Investor, Forbes Billionaire Investor and Forbes Premium Income Report.
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