What Is the Dogs of the Dow Investment Strategy?

Quick Answer

The Dogs of the Dow is an investment strategy that focuses on the top 10 dividend-paying stocks in the Dow Jones Industrial Average. The goal is to outperform the index over the long term. Nothing is guaranteed, of course, and there’s always risk when investing in individual stocks.

Woman holding a dog trading stocks on a computer at home

Dogs of the Dow is an investment strategy that focuses on stocks that pay dividends. The idea is to evenly invest in the top 10 dividend-yielding stocks listed in the Dow Jones Industrial Average (DJIA). A dividend is a regular payment some companies make to shareholders as a way of distributing profits. Dividends are typically paid by mature companies that don't need to reinvest that money in growth. Higher dividend yields typically mean lower stock prices.

Does the Dogs of the Dow approach yield better returns than other investment strategies? The answer isn't so simple. Risk is always part of the equation—and gains are never guaranteed. Here's a closer look at how it works.

How Does Dogs of the Dow Work?

The Dow Jones Industrial Average is one of the world's largest stock market indexes and includes 30 stock listings. The Dogs of the Dow strategy has investors focus on the 10 stocks that pay the highest dividends. Theoretically, they should also have the lowest share prices.

It's a form of individual stock picking. That's different from investing in mutual funds, index funds or exchange-traded funds (ETFs), which can include a variety of securities. Buying individual stocks is considered especially risky. If prices drop, you could suffer real losses—but the theory is that Dog stocks will eventually rebound. Dividends paid along the way are considered an extra bonus.

The strategy stems from the 1991 book "Beating the Dow," by money manager Michael B. O'Higgins. It could be a viable investment strategy for those who have a high appetite for risk and are prepared to ride out market swings as they come. Here's how it works in practice:

  1. At the end of the year, invest evenly across the top 10 Dow stocks that pay the highest dividends. If you have $2,000 to invest, that means investing $200 in each one. You can do this through a brokerage account.
  2. At the end of the following year, sell stocks that are no longer in the top 10 and invest evenly in the 10 stocks that are now paying the highest dividends.
  3. Repeat the process annually.

Is Dogs of the Dow a Smart Way to Invest?

One 2019 study published by the International Journal of Economics and Finance looked at the Dogs of the Dow approach from 2000 to 2017. After accounting for trading costs and taxes, it didn't find a substantial boost in average returns. And every year is different. Dog returns in 2016 were over 20%, compared with a 13% gain in the Dow index. The following year, the Dow posted a 25% return, while Dog stocks only returned about 18%.

It's also worth noting that the Dogs of the Dow strategy leaves little room for diversification. This is a crucial part of investing because it spreads out risk. A well-diversified portfolio includes a mix of asset classes and different investments. If you're solely invested in 10 dividend stocks, that means each company makes up one-tenth of your portfolio. As a result, you're more likely to feel the jolts of volatility. That isn't always a bad thing, of course. Market swings can also bring large gains.

This is all to say that investing in stocks is always risky. The Dogs of the Dow strategy makes investment choices based purely on dividend yields. Your own individual values never come into play. That could pose a dilemma if you prefer socially responsible investing, which involves investing in companies that are aligned with your values.

If you have a substantial amount of money to invest and want to make the Dogs of the Dow one small part of your overall investment strategy, you could potentially reap solid returns over time.

How to Choose an Investing Strategy That Works for You

The best investment strategy is one that's tailored to you. Here are some factors that can help guide you in the right direction.

  • Think about your financial situation. If you're in the process of paying down debt or building your emergency fund, you might not have a lot of extra income to put toward investing. Try to contribute enough to your 401(k) to recoup an employer match if that's an option (it's free money, after all), and ideally set aside 15% to invest in retirement if you're able.
  • Consider your financial goals. Why are you investing in the first place? Saving for retirement is a common long-term goal. Beyond that, you might have your sights set on buying a home, starting a business or padding your kids' college funds.
  • Determine your risk tolerance. Assuming some investment risk can help you grow your wealth over the long term and keep up with inflation. But you'll want to be strategic. Investing too heavily in volatile assets could lead to significant losses. Think about striking a balance and investing in a way that supports your goals without exposing yourself to too much risk. That will look different from investor to investor.
  • Diversify, diversify, diversify. Again, it's important to have a healthy mix of assets in your investment portfolio. ETFs and mutual funds provide built-in diversification because they allow you to invest in a variety of holdings within one fund. It can be easier to absorb losses when other parts of your portfolio are performing well.

Tax-advantaged retirement accounts can be a great way to invest in your future. Putting money in 401(k)s and traditional individual retirement accounts (IRAs) provides tax breaks during your working years. Roth accounts allow for tax-free withdrawals in retirement. An experienced financial advisor can help you build your nest egg in the most tax-efficient way possible. They can also evaluate your financial situation and goals, then recommend investing strategies from there.

The Bottom Line

The Dogs of the Dow is an investment strategy that focuses on stocks that pay dividends. By investing evenly in the top 10 dividend-yielding stocks, the hope is that you'll eventually outperform the Dow Jones Industrial Average over the long term. Nothing is guaranteed, of course, and there's always risk when investing in individual stocks.

Building your investment strategy around your goals, age and risk appetite can help mitigate risk. That involves diversifying your portfolio and rebalancing your investments as needed. In the meantime, Experian can provide free financial resources. Check your credit report and credit score at any time. Maintaining healthy credit is important regardless of what your investment strategy looks like.