Dogs of the Dow

At the end of each year, traders like asking each other a very common question: “Did you beat the market?”. I get the same question every now and then when I talk about investing to others. While it is a valid question and has its value, my focus in investing is not to beat the market. Yes, you read that right – I am not interested in beating the market.
I understand why people ask this question; afterall, if you cant beat the market – why pick individual stocks instead of just buying the whole market using index funds? I think index funds have their place in most portfolios and a lot of people who do not have the time to manage a portfolio, understand investing or even dividend investors looking for broad market exposure (especially in bull markets) should use index funds for their investing needs.

So, if I am not interested in beating the market – how do I measure my performance? Simple – I am only interested in building and growing my income stream. Each year, I set a target of reaching my passive income to a certain level and keep investing until I hit that number to measure my performance. Nothing measures performance as cold hard cash that I see in dividends being deposited in my accounts week after week. But for the sake of this article, I will be exploring the trading strategy that was popularized by Michael B O’Higgins’ book Beating the Dow.
The investing strategy is extremely simple – the Dogs of the Dow are the 10 of the 30 companies belonging to the Dow Jones Industrial Average (DJIA) with the highest yield. The Dogs of the Dow strategy involves investors shuffling around the portfolio to adjust it to have equal allocation to the 10 highest yielding stocks. Why the highest yielders? Because those are the stocks that have fallen out of favor and the stock price has been punished for whatever reason resulting in a high yield. Generally speaking, the companies that belong on the DJIA are blue chip companies that have a solid track record over the years. So, chances of those DJIA companies going bust are extremely low.
The current dogs include AT&T (T), Verizon (VZ), Merck (MRK), Intel (INTC), Pfizer (PFE), McDonalds (MCD), Chevron (CVX), General Electric (GE), Cisco Systems (CSCO) and Microsoft (MSFT). I recently added AT&T (T) – the top Dog of the Dow to my portfolio. The company provides a juicy 5.3% yield and also has a track record of raising dividends year after year.
Do you use this or a similar strategy in your investment portfolio?
Full Disclosure: Long CVX, GE, T. My full list of holdings is available here.