Table of contents:
- 1 What does Dogs Of The Dow mean?
- 2 Where does the strategy come from?
- 3 Why does the strategy work?
- 4 Historical performance
- 5 Own backtest 2010 – 2019
- 6 Selected period
- 7 Results, Interpretation & Conclusion
- 8 Problems with backtesting
- 9 Total Return Indices
- 10 Dogs vs SPY
- 11 Data (Dividends) on the Dogs Of The Dow website
- 12 Conclusion: High expectations were not confirmed
In the Dogs Of The Dow strategy, the ten shares with the highest dividend yield of the Dow Jones Index are determined annually. The same amount is then invested in each of the ten shares. After one year, the portfolio is reviewed and reallocated so that the same amount is again invested in the ten new Dogs Of The Dow.
What does Dogs Of The Dow mean?
The English word “Dog” literally means not only “dog”, but is also used colloquially for an inferior thing or derogatory towards people. In dictionaries you can find translations such as “botched”, “flop”, “bankruptcy” etc.
The “Dogs Of The Dow” are therefore to be understood as those shares of the Dow Jones Index that have recently shown a poor performance and therefore the dividend yield – i.e. the ratio of dividend to current price – is particularly high. It is assumed that these shares are currently undervalued and that a recovery can be expected in the long term, as they are large value companies or shares.
However, a high dividend yield can also be achieved if the dividend is exceptionally high without the share price having fallen sharply.
Where does the strategy come from?
The Dogs Of The Dow investment strategy became known to a broad public in 1991 with Michael B. O’Higgin’s bestseller “Beating The Dow”. The American asset manager tested the strategy back to the 1970s and achieved returns that were on average about 2.5% above the Dow Jones Index. The Dogs Of The Dow developed into a popular dividend strategy, particularly in the USA.
However, the idea of investing in shares with a high dividend yield is older. In 1949, Benjamin Graham recommended in The Intelligent Investor that one should invest in the shares of the Dow Jones Index with the lowest P/E ratio. John Slatter suggested in the late 1980s that dividend yields should be used as the primary selection criterion instead of the P/E ratio. The term “Dogs Of The Dow” was invented by the US stock market magazine Barron’s.
Why does the strategy work?
In order to successfully implement an investment strategy, a certain amount of self-confidence, trust, conviction and mental strength is required in addition to professional knowledge and technical prerequisites. In order to achieve all this, a backtest that documents past results helps on the one hand; on the other hand, a trading or investment strategy should always be based on simple and clearly understandable premises that explain why the strategy works.
The Dogs Of The Dow strategy invests in undervalued stocks of the Dow Jones Index. The Dow Jones consists of 30 American heavyweights. This means that it is assumed that the weakness of a stock will, on the one hand, lead to a recovery in the medium term, as these are solid, profitable and highly capitalized companies that will survive crises.
On the other hand, the high dividend yield itself is another reason for an investment. US companies are reluctant to cut dividends even in times of crisis, and the Dow Jones often includes so-called dividend aristocrats – companies that have been increasing their dividends year after year for decades.
The Dogs Of The Dow are a dividend strategy from the USA.
It is invested in shares of the Dow Jones with the highest dividend yield.
Long-term backtests show an outperformance against the Dow Jones Index.
My own backtest shows results that do not show a clear outperformance (since 1996).
Michael B. O’Higgins book introduced the Dogs Of The Dow strategy in his book “Beating The Dow” and pointed out that the strategy has outperformed the Dow Jones by about 2.5% since the 1970s.
On the internet you can read in various places (wikipedia and others) that backtests back to the 20’s by O’Higgins and others have also shown a significant outperformance.
Since I found some articles and backtest with different results, I did a backtest of the Dogs Of The Dow myself.
Own backtest 2010 – 2019
For my own backtest, the following data was determined and researched:
- Dogs Of The Dow (stocks) of the corresponding year
- Closing price previous year
- Closing price
- Dividend amount
I got the data from Stockcharts.com, Yahoo Finance, and DividendInvestor.com.
From the data I calculated the performance of the share, the dividend yield and the total return (performance + dividend).
In addition, the results were compared with the data on the Dogs Of The Dow website and where there were occasional discrepancies, various sources were checked more closely so that the data is as accurate as possible. This was especially necessary if there was a stock split or a spin-off during the year.
When comparing the results with the Dow Jones Index and calculating outperformance (or underperformance) and average performance, I also made a point of comparing apples with apples. Therefore the total return of the Dogs Of The Dow was compared with the Dow Jones Industrial Average Total Return Index.
In my own baking test I have limited myself to the last 10 years. On the one hand, the further one goes into the past, the more difficult it is to obtain “clean” data. Especially in the case of stock splits, spinoffs and takeovers the data has to be adjusted and here I found some slight differences between the different data. On the other hand, the results of the last 10 years should be just as convincing as those of a longer period, so that the strategy has a certain robustness.
Dogs Of The Dow vs. broad market (data from the “official” website)
Next, we compare the performance of the Dogs Of The Dow strategy (data from the Dogs Of The Dow website) with the Dow Jones (Total Return Index) and the S&P 500 (Total Retrun Index) over a longer period of time.
For the Dow Jones Total Return Index I have data since 2002, for the S&P 500 Total Return Index the data history is longer. Therefore, when you compare 1996 – 2019, you only see the S&P 500 Total Return Index.
Results, Interpretation & Conclusion
Is it worth the effort?
This article and the associated own backtests and comparisons with the broad market have served to find out whether the Dogs Of The Dow strategy can still achieve a significant outperformance against the overall market. Over the last 10 years, the strategy has indeed outperformed the broad market. However, since 1996 and since 2002 I have seen no or no significant outperformance.
Problems with backtesting
At this point I would like to give you some hints about my own backtests and about the comparison of the Dogs Of The Dow strategy with the broad market.
Total Return Indices
The performance of the Dogs Of The Dow strategy was compared with the total return indices (Dow Jones & S&P 500). In the case of the Total Return Indices, the dividend is reinvested immediately. In contrast, when calculating the performance of the Dogs Of The Dow, the performance of the shares (for one year) was calculated and then the dividend was added.
Since dividends are usually paid out four times a year in the USA, the performance of the Dogs Of The Dow would be slightly better if the dividends were reinvested immediately.
To make the comparison even more accurate, one would therefore have to add about 0.2 – 0.5 % to the performance of the Dogs.
Dogs vs SPY
The SPY is the best-known ETF on the S&P 500 and pays dividends on a quarterly basis. Therefore, a comparison of the performance of the SPY with the Dogs Of The Dow under exactly the same conditions is useful.
This means that unlike the Total Return Indices, I calculated the performance of the SPY using the same method as the Dogs Of The Dow (reinvesting dividends annually rather than quarterly).
The average performance of the SPY from 2010 – 2019 was thus 13.88 % (in contrast to 14.15 % for the S&P 500 TR Index). The average outperformance of the Dogs Of The Dow relative to the S&P 500 over the same period is therefore 1.65%.
Data (Dividends) on the Dogs Of The Dow website
On the Dogs Of The Dow website, the dividend yield for all shares from the Dow Jones is given for each year. As I found some discrepancies in my own backtest, I compared data from different sources for verification and came to the conclusion that the figures on the “official” Dogs Of The Dow website are not always 100% correct. Although the deviations are usually relatively small, a deviation in one decimal place may lead to a considerable distortion in the total and over the years.
It is not possible to judge whether the errors are purely accidental or systematic, in order to make the results more attractive. For my own backtest since 2010, I checked the data several times (with different sources).
Conclusion: High expectations were not confirmed
The Dogs Of The Dow are regarded as a strategy with which an outperformance can be achieved in the long term. However, our own backtests and comparisons of the strategy’s performance with the broad market over various periods of time do not confirm this. Depending on the chosen time period, the Dogs Of The Dow have either not outperformed the market since 1996, or have done so only to a relatively small extent. Especially over the longer periods, no really convincing results could be achieved in the last 25 years that would justify the effort. An investment in an ETF on the Dow Jones or the S&P 500 would have yielded roughly the same total return.
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