During periods of economic uncertainty or when the stock market is volatile, high-dividend stocks are often seen as safe havens for investors.

However, not all stocks in the US stock market can provide stable dividends. So how can you quickly find high-dividend stocks with stable and relatively high quality?

This article will introduce you to a very simple defensive stock selection strategy: the Dogs of the Dow.

What are the Dogs of the Dow?

The Dogs of the Dow, introduced by money manager and author Michael B. O'Higgins in 1991, is a stock-picking strategy that selects the top ten highest dividend-yielding stocks from the Dow Jones Industrial Average (DJIA) annually.

While the market experienced a downturn in 2022, the Dogs of the Dow portfolio performed well, rising by 2.2% including dividends. In contrast, the Dow Jones Industrial Average fell by 8.8%, while the S&P 500 and Nasdaq plummeted even further.

For conservative investors seeking steady dividends and potential capital gains, the Dogs of the Dow strategy may be a suitable choice.

How Dogs of the Dow work？

At the core of the Dogs of the Dow strategy is a focus on dividend yield, which serves as an indicator of valuation. A higher dividend yield suggests that a stock price may be undervalued, potentially presenting a profitable opportunity, all else being equal.

The underlying idea is quite straightforward. The 30 stocks in the Dow Jones Industrial Average are typically carefully selected history-honored "blue-chip" companies with strong financials, stable profits, and market capitalizations that often run into billions, which tend to maintain a consistent dividend policy.

However, their stock prices may fluctuate during economic cycles. Companies at the bottom of the business cycle typically have lower stock prices than those at the peak. As a result, high dividend-yielding stocks may indicate that a company is in the trough of the business cycle, with its stock price already relatively low. This presents a potential opportunity for investors interested in pursuing the Dogs of the Dow strategy.

Source: CFI

How to use the strategy？

To use the Dogs of the Dow strategy, investors may follow these steps:

1. Select the top 10 highest dividend-yielding stocks in the DJIA after the stock market closes on the last day of the year.

2. Invest an equal amount of money in each of these stocks on the first trading day of the new year.

3. Repeat Step 1 by rebalancing the portfolio and reallocating capital into the new top ten dividend-yielding stocks.

Every investment strategy involves risks, and no strategy can guarantee 100% success or completely avoid potential losses. It is important for investors to understand their risk tolerance and conduct thorough research and due diligence before making any investment decisions.

The Dogs of the Dow for 2024

According to data from DogsoftheDow.com, as of the closing prices and dividend yields on December 29, 2023, the "Dogs of the Dow" for 2024 are the following 10 companies:

The Dogs of the Dow Performance

According to analyst John Slatter's article in The Wall Street Journal, this strategy worked well initially.

From 1973 to 1988, it delivered an impressive annual return of 18.4%, nearly double the Dow Jones Industrial Average's 10.9% annual return.

But, over the last decade, this strategy has struggled to beat the broader market.

Recent data from the S&P Dow Jones Indices reveals that from 2012 to 2022, the strategy had an annualized return of 11.6%, slightly below the Dow Jones Industrial Average's 12.2% and the S&P 500 Index's 12.5% annualized returns.

Is this strategy still a good choice?

While the Dogs of the Dow strategy has slightly trailed behind the Dow Jones in the past decade, it remains a reliable choice for investors interested in adding high-yield blue-chip stocks to their portfolio, particularly if they're uncertain about stock selection.

On moomoo desktop, it's easy to find the current top ten dividend-yielding stocks in the Dow Jones Industrial Average.

Here's how: Open moomoo, go to the Dow Jones Industrial Average details page, click on "Constituent Stocks," and sort the stocks by dividend yield TTM to find the top ten.

Source: moomoo. Data as of September 1, 2023.

In Summary

• The Dogs of the Dow strategy involves selecting the top ten highest dividend-yielding stocks from the Dow Jones Industrial Average, buying them at the start of the year, and selling them at year-end.

• The core principle of this strategy is high dividend yield. A higher yield might indicate potential undervaluation, offering a chance for higher returns.

• Although it has slightly underperformed the Dow Jones over the past decade, the Dogs of the Dow strategy remains a solid option for investors seeking to add high-yield blue-chip stocks to their portfolios without the complexity of stock selection.