Finding the best, most reliable, and highest dividend stocks isn’t as hard as it seems. The Dogs of the Dow investment strategy can make it even easier. Here’s how it works:
The Dogs of the Dow strategy rests on two simple ideas:
1) Among all the dividend stocks available, the top-performing blue-chip companies from the Dow Jones Industrial Average are your best bet for stable returns.
2) By purchasing the highest dividend-yielding stocks when their prices are low, you’ll likely benefit as their prices rise (the classic buy low, sell high strategy).
So, how do you implement this strategy?
It’s straightforward:
1. On the last day of the year, list all the stocks in the Dow.
2. Sort this list by Dividend Yield Percentage, from highest to lowest.
3. On the first day of the new year, invest an equal amount of money in the top ten highest dividend stocks. These are your “dogs.”
4. Hold onto these stocks for a year.
5. At the end of the year, repeat steps 1-4 and reinvest any dividends received.
Alternatively, instead of the top 10, you can choose just the five lowest-priced stocks among these ten, known as the Small Dogs of the Dow.
How has this strategy performed over time?
Typically, both the Dogs of the Dow and the Small Dogs of the Dow have outperformed market indexes like the Dow Jones and S&P 500. However, the reduced diversification can lead to greater losses during tough years. As with all stock strategies, consider the risks.
The simplicity of the Dogs of the Dow strategy is one of its best features. There’s no need for in-depth research, and all necessary information is readily available. You can manually compile a list of qualifying stocks from the Dow Jones or use a website that provides this data. Then, with a brokerage account setup, you’re ready to go!
At a minimum, you’ll sell your 10 Dogs of the Dow stocks at year’s end and buy them again the next day, totaling 20 transactions. Using a discount broker charging around $4 per trade, your annual cost would be about $80. The Small Dogs of the Dow strategy, with only 10 transactions yearly, would cost $40.
To avoid taxes eating into your gains, consider using an IRA or other tax-advantaged accounts.
I rediscovered the Dogs of the Dow investment strategy this summer while re-reading Jason Kelly’s “The Neatest Little Guide to Stock Market Investing.” Even though I read it years ago, it was refreshing to see this strategy again, especially with my renewed interest in dividend stocks. While I initially targeted Dividend Aristocrats, I now believe the Dogs of the Dow could be a better, more stable approach.
