An Introduction to Durig Capital’s Dogs of the Dow Portfolio Strategy

  • Simply put, the Dogs of the Dow investment strategy is a method of designing a portfolio around established, blue-chip companies that have verifiable long-term returns.
  • Durig Capital reviews its own version on a time-proven investment strategy
  • Since its inception (June 6, 2017) Durig’s “Dogs of the DOW” Portfolio has generated a total return of 14.26% (as of January 22, 2019). Over the same time period, the greater Dow index generated a return of 11.37%. So, Durig’s “Dogs of the DOW” portfolio returned 25% more than the index.
  • Most notably, during the selloff in the fourth quarter of 2018, Durig’s portfolio was down -5.23% while the greater Dow index was down -11.30%. These figures are as of January 22, 2019.

 This week, Durig Capital reviews its own version on a time-proven investment strategy. The “Dogs of the Dow” investment strategy was introduced by Michael B. Higgins in the early 1990’s as a simple way for investors to design a portfolio around the “dogs” of the broader Dow index, and re-balance it annually. Durig Capital has created its own version on this investment strategy which has historically resulted in a less volatile portfolio and has produced excellent returns since its inception in June 2017.

  • Since its inception (June 6, 2017) Durig’s “Dogs of the DOW” Portfolio has generated a total return of 14.26% (as of January 22, 2019). Over the same time period, the greater Dow index generated a return of 11.37%. So, Durig’s “Dogs of the DOW” portfolio returned 25% more than the index.

  • Most notably, during the selloff in the fourth quarter of 2018, Durig’s portfolio was down -5.23% while the greater Dow index was down -11.30%. These figures are as of January 22, 2019.

  • Year-to-date in 2019, the Durig portfolio was up 1.56%, while the greater Dow index was up 4.71% (as of January 22, 2019). This statistic, along with the results from fourth quarter 2018 illustrate the portfolio’s reduced volatility.


By over-weighting the “top dogs”, Durig Capital has designed a portfolio with historically solid returns, reduced volatility; a winning combination for investors looks to maximize their income while minimizing their downside risk.

Dogs of the Dow Investment Philosophy
 

Simply put, the Dogs of the Dow investment strategy is a method of designing a portfolio around established, blue-chip companies that have verifiable long-term returns. The target companies are all part of the great Dow Jones Industrial Average (DJIA), an index that comprises 30 of the most significant stocks currently trading on the New York Stock Exchange and the Nasdaq exchange. This investment strategy uses the Dow index as a starting point for selecting the stocks that ultimately make up the portfolio. The companies within the Dow index are already known to contribute significantly to overall market direction. The Dogs of the Dow strategy only seeks to fine tune this information and identify which are most likely to outperform over the coming year.

 

In practice, the Dogs of the Dow strategy is fairly simple. At the end of the year (the last trading day), investors select the 10 Dow stocks with the highest dividend yields and invest equal amounts of money into each of the 10 stocks on the first trading day of the following year. The investments remain unchanged for the balance of the year when the process repeats again. Investors re-balance the Dogs of the Dow to start each year with an equal amount of money invested into each of the ten companies.

 

In some years, this investment strategy will outperform the overall Dow index and in other years it will under perform. However, over the long term, the average gains do provide investors with the desired positive gains. The following image shows returns between 2000 and 2014.

 



The basic concept at work here is that high dividend yields stem from share price declines. As the business cycle goes through its natural ups and downs, the Dow stocks with the highest yields are more likely to increase their share price over the following 12-month period. In addition, many of the Dow companies have declared dividend payouts and these payouts are generally less volatile than share prices. Therefore, substantial share price declines will be a main driver of significant increases in dividend yields.

 

Current Dogs of the Dow Stocks for 2019
 

Here is a list of the Dogs of the Dow stocks for the current year.

 


Nearly all of the Dogs of the Dow stocks from 2018 are included on this year’s list with the exception of newcomer JP Morgan Chase, which replaced General Electric from 2018’s list.

 

Durig Capital’s Version of Dogs of the Dow

 

Nearly two years ago, Durig Capital began its own Dogs of the Dow Portfolio Strategy using the basic concept of the original program with its own unique spin. The portfolio contains 9 holdings (9 equity positions) that are each contained in the greater Dow index. The difference is that Durig Capital has over-weighted the top dogs. In other words, there is a greater level of investment in the equities with the highest yields. The top yielding equity gets roughly double the amount of the lower yielding equities. The portfolio has nearly all of the “dog” stocks, or nine stocks in total.

 

Durig’s Dogs of the Dow Review
 

How did Durig Capital’s Dogs of the DOW Portfolio Strategy perform over the past few years of up and down markets? Here are some highlights:
 

  • Since its inception (June 6, 2017) Durig’s “Dogs of the DOW” portfolio has generated a total return of 14.26% (as of January 22, 2019). Over the same time period, the greater Dow index generated a return of 11.37%. So, Durig’s “Dogs of the DOW” portfolio returned 25% more than the index.

  • Most notably, during the selloff in the fourth quarter of 2018, Durig’s portfolio was down -5.23% while the greater Dow index was down -11.30%. These figures are as of January 22, 2019.

  • Year-to-date in 2019, the Durig portfolio was up 1.56%, while the greater Dow index was up 4.71% (as of January 22, 2019). This statistic, along with the results from fourth quarter 2018 illustrate the portfolio’s reduced volatility.


These statistics illustrate a key feature of Durig’s Dogs of the DOW Portfolio Strategy – it has less volatility than the greater DOW index. Although the upside hasn’t been as rosy year-to-date, the downside was not nearly as ugly as the greater DOW index in the selloff that took place in December of 2018. Most likely, Durig’s over-weighting of the higher yielding equities helped to decrease the overall volatility of the portfolio. This lower volatility is evidenced by the portfolio’s Beta, a measure of portfolio risk. Durig’s “Dogs of the DOW” Portfolio has a Beta that is roughly three-quarters (3/4) of the greater Dow index. Yet, since its inception, the portfolio has outperformed the greater DOW index handily. 


Durig’s Dogs of the Dow Portfolio Alpha

Alpha tells you how well a mutual fund or similar investment performs compared to the stated benchmark it’s trying to beat. Durig’s Dogs of the Dow Portfolio’s most recent Alpha was a whopping 5.00 points over the Dow Jones Industrial Average.

 

Possible Limitations for Dogs of the Dow Investment Strategy
 

In spite of the Dogs of the Dow’s simplicity, there are some who would argue its limitations or criticisms. First, the strategy involves rotating the portfolio stocks each year. While some “dog” stocks might remain the same from year to year, there are likely going to be changes with some of the holdings. This re-balancing could result in short-term capital gains for shares held for less than one year. And even if you hold a stock over a period of several years, when you eventually sell it, if it is in a taxable account you will need to pay long-term capital gains, thereby lowering your total return.
 

Another possible argument is that higher dividend paying stocks mean higher taxes for the account holder. Unless the portfolio is held within a tax-sheltered or tax-deferred account (like a retirement account), these dividends would mean additional income taxes to the account holder.
 

Finally, some would argue that an investment portfolio of only 10 stocks is not properly diversified, which could create additional risk. However, as illustrated in the chart above, this strategy beat both the broader Dow index and the S&P 500 between 2000 and 2014.

 

Summary and Conclusion

 

The Dogs of the Dow Strategy is just one of many investment strategies that can be used by investors who are looking to maximize return while reducing portfolio risk. Durig Capital’s unique spin on this strategy has resulted in a portfolio that has outperformed the broader Dow index as well as the S&P 500 since June of 2017, all with less volatility than each of those indexes. Durig Capital’s Dogs of the Dow Portfolio Strategy looks to produce higher income with less volatility through over-weighting the “top dogs” – those equities with the highest dividend yield.  

 

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Disclaimer: Durig’s Dogs of the DOW Portfolio Strategy presented in this review by Durig Capital may not be suitable for all investors.  This is not investment advice from Durig Capital, nor a specific recommendation to buy or sell securities.  If you have any questions or concerns about its suitability for your personal investment, you should seek specific investment advice from a registered professional before making an investment decision. Past performance is no guarantee of future results.

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