Dogs of the Dow Performance History and Long-Term Investment Success

The Dogs of the Dow strategy has been around since 1991, when Michael B. O'Higgins published his book "Beating the Dow." The strategy involves selecting the 10 highest-yielding stocks in the Dow Jones Industrial Average and holding them for the entire year.

This approach is based on the idea that high-yielding stocks are more likely to outperform the broader market over time. In fact, the Dogs of the Dow have outperformed the Dow Jones Industrial Average in 7 out of the last 10 years.

The strategy requires discipline and patience, as it involves holding onto the same stocks for the entire year, regardless of market fluctuations. By doing so, investors can potentially reap the rewards of high dividend yields and long-term growth.

The Dogs of the Dow have delivered impressive returns, with an average annual return of 11.6% since 1991.

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Analyzing performance is a crucial step in making informed investment decisions. Historical performance data provides valuable insights into an investment's potential risks and rewards.

Consistent returns over an extended period are a positive sign, but it's essential to evaluate performance during different market conditions. Consider significant events or factors that may have influenced the investment's performance.

Comparing an investment's performance against relevant benchmarks is vital. For instance, analyzing the historical performance of a mutual fund against similar funds or benchmarks can help gauge its performance potential.

Risk-adjusted returns, such as the Sharpe ratio or Sortino ratio, are essential metrics to consider. These metrics consider both the absolute return and the risk associated with an investment. A higher Sharpe ratio indicates better risk-adjusted performance.

Analyzing historical performance also reveals market cycles and trends. Understanding these cycles helps investors make informed decisions. For example, during a bull market, stocks tend to rise, and riskier assets perform well.

Compound Annual Growth Rate (CAGR) is a useful metric to calculate the average annual growth rate of an investment over a specified period. It smooths out fluctuations and helps understand long-term performance. A low-risk bond fund might have a CAGR of around 4%, while a tech stock could be around 15%.

Drawdowns measure the decline in an investment's value from its peak to its trough. Understanding drawdowns helps manage risk. A strategy with frequent and deep drawdowns may be psychologically challenging for investors.

Benchmarking is essential to compare a strategy's performance against a relevant benchmark. For equity investments, common benchmarks include the S&P 500, NASDAQ, or regional indices. A strategy that consistently outperforms its benchmark may be worth considering.

Analyzing historical performance provides essential context for portfolio management. Investors should consider risk, return, and market cycles when making decisions.

The Dogs of the Dow strategy has been back-tested as far back as the 1920s, and the results are impressive.

O'Higgins and others found that investing in the Dogs consistently outperformed the market as a whole. This suggests that the strategy has a long history of success.

For the twenty years from 1992 to 2011, the Dogs of the Dow matched the average annual total return of the DJIA (10.8 percent). The Small Dogs of the Dow outperformed both the Dow and S&P 500 with an average annual total return of 12.6 percent.

The Dogs of the Dow and Small Dogs of the Dow did not consistently perform well on a yearly basis, struggling to keep up with the Dow during the latter stages of the dot-com boom (1998 and 1999) and the financial crisis (2007–2009). This suggests that investors should view this as a longer-term strategy.

In 2018, the Dogs of the Dow portfolio generated 27% in total returns, outperforming the Dow's 21% return.

The Dogs of the Dow portfolio consisted of current Dow stocks, including Verizon, IBM, Chevron, Merck, Coca-Cola, Cisco Systems, and Procter & Gamble, as well as former components Pfizer, ExxonMobil, and General Electric.

Four of the Dogs returned more than 45% in 2018, making up for the six Dogs that underperformed the index. One of the underperforming Dogs lost 8% in value.

The results in 2019 and 2020 were not favorable, with the Dogs of the Dow portfolio generating 18.7% and (7.9%) in total returns, respectively, while the Dow returned 25.3% and 9.7% in those years.

The Dogs of the Dow portfolio outperformed the Dow in 2021, with 25.3% in total returns compared to 21% for the index.

This shows that the Dogs of the Dow portfolio strategy can result in widely divergent results from year to year, making it essential to consider the potential tax consequences of rebalancing and reallocating the portfolio each year.