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CHAPEL HILL, N.C. (MarketWatch) — Trading volume may be light on the New York Stock Exchange, but this week is the busiest of the entire calendar for followers of the Dogs of the Dow investing strategy.
I’m referring to the strategy that calls for investing at the close of business each Dec. 31 in the 10 stocks in the Dow Jones Industrial Average DJIA, -0.45% with the highest dividend yields. It calls for no other changes for the entire year.
Those stocks are referred to as “dogs” because they typically are among the Dow’s worst performers in the previous year. As their prices declined, their dividend yields rose (as long as the companies didn’t cut their dividends).
My message to the strategy’s followers: Relax. There is no need to disrupt year-end festivities.
Read: Here’s how the Dow and S&P 500 perform in years after they ring up gains of 20%
Real dogs
That’s because, according to my performance tracking, the Dogs of the Dow strategy has not outperformed the Dow Jones Industrial Average over the past two decades.
Take 2019. With two trading days left, the 10 highest-yielding Dow stocks from the end of 2018 have produced an average total return of 20%, according to FactSet. That compares with a 22.8% gain for all 30 Dow stocks (as measured by the SPDR Dow Industrials ETF DIA, -0.47% and a 31.6% total return for the S&P 500 Index SPX, -0.44% (as measured by the SPDR S&P500 SPY, -0.41% ).
This year’s experience is more the rule than the exception. Since 1999, the Dogs of the Dow strategy has lagged behind the Dow ETF on a total-return basis by an annualized margin of 7.8% to 6.9%.
Nor can Dogs of the Dow followers justify this market-trailing performance by claiming their strategy was more conservative than the market as a whole. On the contrary, the strategy was slightly more volatile over the past two decades than the Dow ETF (as measured by the standard deviation of calendar-year returns). So a simple broad-market index fund comes out even further ahead on a risk-adjusted basis.
Bear-market losses
The Dogs of the Dow strategy also lost more than the overall market during the 2007-2009 bear market that accompanied the financial crisis. In contrast to a 52.4% decline for the SPDR S&P 500 ETF, the Elements Dogs of the DOW Dow Jones High Yield Select 10 Total Return ETN lost 65.8% of its value (according to FactSet for the period from Nov. 7, 2007, when the ETN was launched, until March 9, 2009).
I hasten to add that you shouldn’t conclude from these results that dividend stocks are now to be avoided. On the contrary, the investment rationale for favoring such stocks remains as strong as ever. The question at hand isn’t whether to favor dividend stocks but how to go about picking them.
My auditing firm’s performance tracking has identified other dividend-stock approaches that have performed far better, and I refer you a list of the top performers in my ranking. (Note that the newsletters included in the ranking are those that paid a flat fee to have their returns audited.)
Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com.
