This popular equity strategy was beaten in 2020. Why 2021 will be different

2020 has been a crazy year for the stock market. After being absolutely crushed in the first quarter, the Dow Jones Industrial Average (DJINDICES: ^ DJI) spent the rest of the year climbing out of a big hole. By mid-December, the Dow was up 5% in 2020 and has recently hit new record highs.

Because the Dow is so popular, there are several investment strategies that use the 30 constituent stocks as a starting point. The best known is the Dogs of the Dow approach, which has a solid track record of actually beating the Dow from year to year over the long term. While 2020 has been all bark and no bite for the Dogs of the Dow, there is reason to believe that 2021 will be more promising for investors who love dogs.

2020: Dogs of the Dow vs. Dow Jones


Price change in 2020 Year to Date

Dow Jones Industrials

+ 5.3%

Dogs of the Dow


Source: Yahoo! Finances. As of December 11.

What are the Dogs of the Dow?

Those looking for an easy way to invest will love the Dogs of the Dow because the strategy only requires one set of trades per year. Each December, you rank the 30 stocks that make up the Dow Jones Industrial Average on December 31, based on dividend yield. The 10 highest yielding stocks are the Dogs of the Dow for the year. To invest, you just put the same amount of money into buying shares of all 10 stocks. Then you stay tight until December.

Dog with paw on a calculator, with money nearby.

Image Source: Getty Images.

The appeal of the Dogs of the Dow is that it tends to identify crushed, well-priced stocks. Lower stock prices increase dividend yields and push those stocks to the top of the list. But because the Dow is made up of the strongest companies in the market, most of the downturns the individual component stocks undergo will soon reverse – often by the following year. That typically delivers strong performance with the Dogs of the Dow.

How 2020 muzzled the Dogs of the Dow

Several investment themes worked against the Dogs of the Dow this year. In general, value stocks that pay higher dividends underperformed their growth counterparts, putting the Dogs at a huge disadvantage.

This was especially evident in a number of areas. Energy stocks fell due to market dynamics and COVID-19-related demand disruptions, affecting the former Dow component ExxonMobil (NYSE: XOM) and current Dow member Chevron (NYSE: CVX) up to losses of 20% to 40%. Though ExxonMobil got kicked out of the Dow in mid-2020, the Dogs strategy will stick with it until the end of the year.

Also, the Dow Dogs’ technical merit dramatically underperformed their healthier counterparts. Neither IBM (NYSE: IBM) nor Cisco systems (NASDAQ: CSCO) was able to come back from difficult years in 2019. Both were behind the year even if Apple (NASDAQ: AAPL) and Microsoft (NASDAQ: MSFT) rose higher.

There will be a new set of stocks for 2021

There is cause for optimism for investors in the Dogs of the Dow in 2021. While many of the Dogs stock is likely to remain the same, some changes may affect the Dogs and the rest of the Dow:

  • ExxonMobil is out of the Dow, which means Chevron will be the only energy game on the list.
  • Currently it looks like a Wall Street giant JPMorgan Chase (NYSE: JPM) will be a new Dog stock for 2021, giving the Dogs financial exposure at a critical time for the economy that could trigger a recovery in the banking sector.
  • Three new members of the Dow are unlikely to be among the dogs, but they will still affect the overall average. sales team (NYSE: CRM) will boost the technical component, Amgen (NASDAQ: AMGN) will add biotech exposure, and Honeywell (NYSE: HON) will enlarge the core industrial base.

And last but not least, Boeing (NYSE: BA) and Disney (NYSE: DIS) have temporarily suspended their dividends, leaving the Dow in the unusual position of some stocks not paying a dividend at all. It will be interesting to see what happens when a recovery gets to the point where Disney and Boeing feel comfortable making payouts to shareholders again.

Every dog ​​has its day

The Dogs of the Dow strategy doesn’t have a perfect track record, and the strategy’s underperformance in 2020 is one of the worst in recent memory. However, the fact that a strategy doesn’t work one year doesn’t invalidate its long-term value. Investors who like dividend stocks should keep a close eye on the Dogs of the Dow in 2021.


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