- This week we ask a simple question: Does the Dogs of the Dow Strategy work?
- Examine the historical effectiveness of this simple strategy.
- Explore the criticisms and benefits of the Dogs of the Dow.
- Benchmark Performance Review of Durig's Dogs of the Dow Portfolio.
Last month, Durig Capital explored several variations of the classic Dogs of the Dow Investment Strategy. Later in the article, we examined the historical performance of these strategy variations, benchmarked against the performance of Durig’s own unique Dogs of the Dow Portfolio Strategy. The original strategy designed by Michael O’Higgins in the book “Beating the Dow” in 1991 was designed for just that; beating the Dow Jones Industrial Average (DJI).
Durig Capital believes that over time the strategy achieve its goal more often than not, but also functions very effectively as a diversification tool used to increase exposure to high yield blue-chip equity aimed at capturing high levels of dividend income.
This week we ask a simple question:
Does the Dogs of the Dow Strategy work?
The simple answer is, yes, but over time. The strategy has been more successful than not in outperforming the Dow Jones over the long term. In the short term, success can vary significantly, but over time, we have come to see the strategy outperform the Dow Jones more often than not.
Successful in the Long-term
The classic Dogs of the Dow Investment Strategy has been more successful than not over the long-term, outperforming the Greater Dow Index four times in the last five years, and seven of the last 10 years, adding further merit to the simple strategy. While the strategy is very simple, it has been our experience that the less moving parts there are, the fewer potential points of failure.
Historical Performance of the Dogs of the Dow vs. The Dow Jones Industrial Average
In recent years, the historical performance of the Dogs of the Dow appeared to outperform that of the Dow Jones more often than not, although they doe tend to track very closely to one another, indicating a positive correlation between the two.
The closely mirrored performance reflects the strong positive correlation between the Dogs of the Dow and the Dow Jones itself, furthering Durig Capital’s belief that a Dogs of the Dow Portfolio should be a diversifying complement to an existing, balanced portfolio, and should not represent an individuals sole investment portfolio, as proper diversification cannot be achieved through a small sampling of equity exposure alone.
Criticisms of the Dogs of the Dow
- The strategy fails to consider short term capital gains that could be triggered during the re-balancing of the portfolio, lowering total return in taxable accounts.
Annual re-balancing helps to ensure that the portfolio is positioned to capture the “cream of the crop” or rather, the “the cream of the Dow”, allowing investors to capture very high levels of dividend income they may not receive without re-balancing
- A portfolio containing 10 stocks cannot be properly diversified. Durig Capital does give some merit to this criticism, and takes the stance that a Dogs of the Dow Portfolio should not represent an individual’s sole investment portfolio, but rather be a component of their other investments, all coming together to form a more complete and diversified investment environment.
- The strategy is just too simple, as the primary consideration in the selection of stocks for investment is a high dividend yield relative to the stock’s price.
While this strategy may ignore many other factors, over time, stocks with high dividend yields do tend to produce higher levels of dividend income, so it should come as no surprise that selecting a small sample of the highest yielding stocks would yield more dividend income than stocks with lower dividend yields.
Some may consider the Dogs of the Dow Strategy more of a rule of thumb, but it is somewhat similar to the style in which High P/E investors select stocks based solely on the expectation of higher earnings on the stock relative to share price, which has been a widely accepted strategy in today’s investment community.
Durig’s Dogs Lead the Pack
Last year (2018), Durig’s Dogs Portfolio outperformed the Dow, both the Dogs of the Dow, and Small Dogs of the Dow.
Let that sink in for a moment.
(Left: Q4 2018, Historical Volatility of the DJI)
In a period containing the most significant bout of market volatility seen in recent years, (See graph on left) Durig’s Dogs of the Dow Portfolio still outperformed the official Dogs of the Dow Strategy, the variations discussed in our last article, not to mention the Dow Jones Industrial Average (DJI), which ended 2018 down (3.5%), compared to Durig’s + 4.79%.
Benchmark Performance of Durig’s Dogs of the Dow
(Performance Shown Above is as of 7-3-19)
The annualized return since inception (lifetime return) of 17.61% is where Durig’s Dogs of the Dow Portfolio truly shines, especially when compared to its closest available benchmark for the Dow (SPDR Dow Jones Industrial Average ETF) which only returned an annualized 12.31% in the same period (6-6-17 to 7-3-19).
Durig’s annualized lifetime return has even outpaced that of the S&P 500 TR Index, which has returned an annualized 12.69% over the same period. Considering the outstanding historical performance of the Durig’s Dogs Portfolio and its practice of strategic weighting, Durig’s Dogs of the Dow Portfolio looks like it could be on track to outpace the Dow Jones for the 2nd consecutive year.
Durig’s Dogs Contain Less Historical Volatility than the Dow Jones Industrial Average
(Performance Shown Above is as of 7-3-19)
Additionally, Durig’s Dogs Portfolio is less correlated to both the Dow Jones and the classic form of the strategy. This means that in both market upturns and downturns, the historical performance of Durig’s Dogs of the Dow Portfolio has risen / fallen at a lesser rate than the traditional Dogs of the Dow, or the Dow Jones itself for that matter. Because it is less correlated to the overall market, the historical returns of Durig’s Dogs of the Dow Portfolio contained much less volatility than the market when viewed as a whole over the same period (see recent quarterly performance above).
Characteristics of Blue Chip Stocks
Blue-chip stocks are thought of by some to generally be more conservative and often less risky stock investments than non-blue-chip stocks, some of the reasons for this are described in the graphic to the left.
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Summary & Conclusion
This year, Durig’s version of the Dogs of the Dow looks to be continuing its outstanding historical performance, having once again outperformed the historical performance of the Dow Jones Industrial Average (DJI), as well as the historical performance of its closest benchmarks.
For investors seeking a portfolio containing less historical volatility than the overall stock market, targets high levels of dividend income through increased exposure to blue-chip equity, Durig’s Dogs of the Dow Portfolio Strategy could provide potential solution, all at a very low cost.
Disclaimer: Please note that all yield and price indications are shown from the time of our research. Our reports are never an offer to buy or sell any security, and are for information only. The high yield strategies presented may not be suitable for all investors. This is not investment advice from Durig Capital, nor a specific recommendation to buy or sell securities. Past performance is no guarantee of future results. 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 any investment decision.