By Mark Hulbert
Popular ‘Dogs of the Dow’ strategy has been muzzled – check out the ‘Timely Ten’
There’s a much better way to collect dividends than following the “Dogs of the Dow” strategy of automatically buying stocks with the highest yields.
This is important to keep in mind at any time, but especially now, at the end of the year. Dogs of the Dow investors are preparing to rebalance their portfolio into the 10 highest-yielding stocks within the Dow Jones Industrial Average DJIA. It is perhaps the most famous of Wall Street’s dividend-stock strategies.
The strategy does have simplicity on its side: It requires just one set of transactions per year, on Dec. 31 – an approach that also keeps transaction costs low. It also used to have an impressive record. When the Dogs burst on the scene in the early 1990s – thanks largely to “Beating the Dow,” a popular book at the time by money manager Michael O’Higgins – the strategy could claim that it had outperfomed the U.S. market by large margins over prior decades.
In recent years, however, the Dogs have struggled. This is evident in the chart below that shows the performance of the Elements Dogs of the Dow Fund, which followed this strategy from its late 2007 launch to its closing in late 2022. The fund kept pace with the Dow Jones Industrial Average up until the late 2010s and then began to lag severely.
Based on the performance of the investment newsletters that my auditing firm monitors, a superior approach to investing in dividend stocks is to focus on “relative” rather than absolute yield. A stock has a high relative yield if its yield is at the high end of its historical yield range. The newsletter that has most championed this focus on relative yield is Investment Quality Trends, edited by Kelley Wright.
According to my auditing firm’s calculations, over the same nearly 15-year period reflected in the chart above, Wright’s newsletter’s model portfolios have beaten the Dogs of the Dow strategy by 6.9 annualized percentage points, and the market itself (as judged by the Dow Jones Industrial Average’s total return) by 1.6 annualized percentage points. (Disclosure: Investment Quality Trends is one of the newsletters that pays a flat fee to have its returns calculated by my auditing firm. Because all monitored newsletters pay the same flat fee, my firm has no incentive to make any newsletter’s returns better than another.)
Stocks with high relative yields often are not the same as those with the highest absolute yields. This is illustrated by contrasting the 10 “Dogs of the Dow” stocks with those on Wright’s current “Timely Ten” list, which represents his top 10 recommendations. Not even one stock appears on both lists. The average current yield of the 10 highest-yielding Dow stocks is 3.4%, in contrast to 2.9% for Wright’s top 10 recommendations.
With this in mind, the table below lists the stocks from Wright’s latest “Timely Ten” list, in alphabetical order. They include Beckton Dickinson (BDX), Chemed (CHE), Clorox (CLX), Omnicom Group (OMC) and T. Rowe Price Group (TROW).
Bear this in mind if you use year-end planning to reorient your portfolio into the most compelling dividend-paying stocks. You quite likely will make more money over the long term by avoiding the stocks with the highest yields.
Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com
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-Mark Hulbert
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