Why Buying the “Dogs of the Dow” Could Pay Off in 2020

Buying the "Dogs of the Dow" Could Pay Off in 2020: Here's WhyTime to Look at the Laggards This Year for Big Gains

In 2019, the stock market was dominated by the momentum stocks, particularly the brand-name technology stocks. But this doesn’t mean value stocks were left out of the action; the Dow Jones Industrial Average returned a healthy 22.3% in 2019, compared to 35.2% for the Nasdaq.

I don’t expect the same sizzling results this year, but you would never know that based on what has happened so far in January.

Simply look at what momentum stocks like Apple Inc. (NASDAQ:AAPL) and Tesla Inc (NASDAQ:TSLA) have done already this year, up 6.3% and 14.7%, respectively.

Many stock-market pundits are emphasizing the need to pull back on chasing momentum stocks this year and focus on defensive value stocks. There is nothing wrong with this strategy, given the gains in 2019.

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While it could be a good idea to be more prudent about overloading on momentum and technology stocks, it could still be a good idea to have decent exposure in the area.

There is clearly money chasing the gains in the stock market, but be careful because bad news could lead to big declines for these stocks.

Why 2020 May Be Great for the Dogs of the Dow

Let’s take a step back and look at alternative trading strategies that have paid off in the past.

For value in mega-cap stocks, you can play the Dow Jones Industrial Average, which comprises 30 blue-chip stocks and is supposed to represent the U.S. and global economies.

But there is another straightforward option to buying the Dow that has actually performed better in seven of the past 10 years. It’s called the “Dogs of the Dow” investment strategy.

This stock-market strategy is as follows. At the start of the year, you invest equal amounts in the 10 highest-yielding stocks on the Dow Jones until the year-end. After this, you rebalance to the new “Dogs of the Dow” stocks.

I call this a contrarian investment on a group of Dow stocks that are strong investments but may be experiencing issues. For this reason, their stock prices are down, resulting in a higher dividend yield.

This strategy is not foolproof, but, as just mentioned, it has beaten the Dow Jones in seven of the past 10 years. The three years of underperformance were 2012, 2017, and 2019.

Fiscal Year “Dogs of the Dow” Stocks Dow Jones Industrial Average
2010 20.5% 14.1%
2011 16.3% 8.4%
2012 9.9% 10.2%
2013 34.9% 29.7%
2014 10.8% 10%
2015 2.6% 0.2%
2016 20.1% 16.5%
2017 19.4% 22.5%
2018 0.02% -3.7%
2019 13.5% 22.3%

2019 had a shortfall due to the strength of several momentum stocks in the Dow: Apple, Microsoft Corporation (NASDAQ:MSFT), Nike Inc (NYSE:NKE) and Walt Disney Co (NYSE:DIS).

The Dogs of the Dow returned about 13.5% in 2019, with nine of the 10 stocks going up (Pfizer Inc. (NYSE:PFE) fell 13%). The top two gainers were JP Morgan Chase & Co. (NYSE:JPM), up 40%, and Procter & Gamble Co (NYSE:PG), up 36%.

For the 2020 Dogs of the Dow list, JPMorgan, Procter & Gamble, and Merck & Co., Inc. (NYSE:MRK) are absent, replaced by Dow Inc (NYSE:DOW), 3M Co (NYSE:MMM), and Walgreens Boots Alliance Inc (NASDAQ:WBA).

2020 “Dogs of the Dow” Stocks Dividend Yield
Dow Inc (NYSE:DOW) 5.4%
Exxon Mobil Corporation (NYSE:XOM) 5.0%
International Business Machines Corporation (NYSE:IBM) 4.8%
Verizon Communications Inc. (NYSE:VZ) 4.2%
Chevron Corporation (NYSE:CVX) 4.0%
Pfizer Inc. (NYSE:PFE) 3.9%
Walgreens Boots Alliance (NASDAQ:WBA) 3.4%
3M Co (NYSE:MMM) 3.2%
Cisco Systems, Inc. (NASDAQ:CSCO) 2.9%
Coca-Cola Co (NYSE:KO) 2.9%

(Source: Google Finance, last accessed January 13, 2020.)

Analyst Take

As the character Gordon Gekko famously said in the movie Wall Street, “If you need a friend, get a dog.”

The simple stock market strategy of focusing on the Dogs of the Dow has its merits, and has proven its ability to outperform over the past decade.