Dogs of the Dow 2018

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The Dogs of the Dow strategy is something I’ve written about in the past here on the blog. As we roll into 2018, lest take a look at how the strategy worked out in 2017 and also see who is on the list for 2018.

As a reminder:

“The Dogs of the Dow is an investing strategy that consists of buying the 10 DJIA stocks with the highest dividend yield at the beginning of the year. The portfolio should be adjusted at the beginning of each year to include the 10 highest yielding stocks.” – Investopedia

The Dogs of the Dow theory was created in 1972 and has proven to be successful more often than not over the years. Sometimes the simple things work the best and this strategy is simplicity to the core. Purely stated, the Dogs of the Dow theory involves buying the 10 highest yielding stocks of the 30 companies in the Dow Jones Industrial Average at the start of each year. The portfolio is then rebalanced at the start of the following year.

The thesis of the trade is that these 10 stocks are quality companies with stable business and healthy, consistent dividend payment. They are temporarily unloved or have experience short-term declines due to various market factors but are likely to bounce back at some point soon.

Companies in the Dow have historically been very stable companies that have been able to weather economic storms. It is unlikely they are going to go out of business any time soon.

Does It Work?

As with any investment strategy, you cannot say in advance that this will work 100% of the time. However, over the long run, the strategy has proven to be a good one. According to Investopedia, between 1957 and 2003, the Dogs outperformed the Dow Industrials by about 3% returning 14.3% annually versus the Dow’s 11%. From 1973 to 1996, the outperformance was even more impressive returning 20.3% annually versus 15.8%.

The following returns were reported by


2017 Dogs of the Dow performance

The 2017 Dogs of the Dow strategy performed very well with BA and CAT achieving phenomenal returns of 89.43% and 69.92% respectively.

IBM, XOM and MRK had slightly negative returns, although factoring in the dividend, brings the return close to even for the year. VZ was down on the year in terms of price but positive overall when including dividends.

An equal weighed portfolio of the 2017 Dogs of the Dow would have produced a before tax return of 28.03% compared to a 23.83% return for the Dow.

Dogs of the Dow for 2018

Going into 2018, VZ again tops the list with its juicy 4.46% dividend. In terms of price, the stock has gone almost nowhere for the last 5 years.

IBM, XOM and MRK make the list after lackluster 2017 returns.

GE had a stinker in 2017 and despite a dividend cut, it scrapes onto the list.

Dow Under Dogs for 2018

Another strategy that goes along with the same idea s the Dogs of the Dow is to buy the 10 worst performing Dow stocks over the last 12 months. Here’s what that list currently looks like:

Using Options To Trade The Dogs Of The Dow

A different method of trading the Dogs of the Dow would be using options. The typical strategy would be to buy all 10 stocks using 10% of your portfolio for each. Rather than do that, you could start selling some cash secured puts on some of the stocks. If you end up being assigned your purchase price will be even lower than the current stock price which make the effective dividend yield even higher.

GE, IBM, XOM and MRK all seem likely candidates for 2018.

Let’s take XOM as an example. The stock was trading at $83.64 at the end of December and had a dividend yield of 3.68%.

Instead of buying shares outright, investors could enter a covered call trade and buy 100 shares of the stock while simultaneously selling a March 16th $87.50 call for $0.55.

Selling the out-of-the-money call, increases the yield by 3.19% per annum.

If the stock rises above $87.50 at expiry the shares will get called away for a $500 profit (note that a dividend of $0.75 will be paid during the life of the trade) for a roughly 6% return or 29.23% annualized.

Selling covered calls over the Dogs of the Dow stocks is a great strategy for building a long term exposure to high quality, high yielding stocks.

It will be interesting to see how these strategies play out over the next 12 months. I’ll be sure to keep you updated.

Trade safe!

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