Top Stocks To Buy Now – Current Dogs of the Dow for 2019

Top Stocks To Buy Now 

top-stocks-buy-nowThe 2018 investing year is now closed.  One strategy that turned out to be a winner was the Dogs of the Dow strategy.  The Dogs of the Dow ended up generating a slight positive total return of .02% for 2018. This compares to a loss of 3.74% for the SPDR Dow Jones Industrial Average ETF (NYSEARCA:DIA) and a loss of 4.56% for the SPDR S&P 500 Index ETF.  The Top Stocks to Buy Now for 2019 are the Current Dogs of the Dow – of course!

Top Stocks To Buy Now – Current Dogs of the Dow for 2019

Dogs Dow List for 2019

1              IBM        International Business Machine                   5.5%      $114

2              XOM      Exxon Mobil Corporation                              4.8%      $68

3              VZ           Verizon Communications                             4.3%      $56

4              CVX        Chevron Corporation                                    4.1%      $109

5              PFE         Pfizer                                                             3.3%      $44

6              KO          Coca-Cola Company                                     3.3%      $47

7              JPM       JP Morgan Chase & Co.                                 3.3%      $98

8              PG          Procter & Gamble Company                        3.1%      $92

9              CSCO     Cisco Systems                                               3.0%      $43

10           MRK      Merck & Co.                                                   2.9%      $76

What is “Dogs of the Dow”?

Dogs of the Dow is an investment strategy popularized by Michael B. O’Higgins in 1991.  It has been a favorite for investors seeking high yields because it locks in steady returns regardless of market conditions.

The Dogs of the Dow are the top 10 dividend-paying blue-chip stocks of Dow Jones Industrial Average (DJIA). The built-in dividend income and good reputation of DJIA companies  makes these stocks the cream of the crop for potential price appreciation. But the high dividend yield is the key attraction for the Dogs.  High dividend yields indicate that these stocks are oversold and should rebound faster than other stocks when the business cycle changes. This should result in higher capital appreciation in the coming year along with the highest yields available in a Dow stock.

From 1957 to 2003, the Dogs outperformed the Dow by about 3%, averaging an annual return of 14.3% compared to 11% for the Dow. The performance between 1973 and 1996 was even more impressive, as the Dogs returned 20.3% annually, while the Dow produced a 15.8% return.

Dogs Dow Theory

With the Dogs of the Dow, you’re simply buying the 10 highest yielding stocks from the Dow Jones Industrials.  A stock’s dividend yield is the simple ratio of annual dividends divided by the share price.  Becoming the Dow’s highest dividend yield stocks essentially means falling out of favor so the dividend yield increases due to a drop in the stock price.

Example: If a stock is expected to pay out $1 in dividends over the next year and is currently trading for $50, its dividend yield is 2%. If that stock drops to $25 but still pays out $1 in dividends, it now has a 4% yield.  A lower stock price with the same dividend amount calculates to a higher dividend yield.

Dogs Dow Strategy

The Dogs of the Dow strategy is fairly simple.  After the last market closing at the end of the year, investors select the 10 Dow stocks with highest dividend yields and invest an equal amount of funds into each of the 10 stocks on the first trading day of the following year.  A Dogs of the Dow strategy using $10,000 would involve investing $1,000 into each of the 10 highest dividend yield stocks. At that point, the Dogs of the Dow strategy require no further attention until the end of the year when the process repeats.

After replacing any stocks from the previous year, investors should again balance their Dogs portfolio.  Each new year should start with an equal amount of money invested in each of the 10 equities that make up the Dogs of the Dow for the coming year.  Remember, Dogs of the Dow is a long-term strategy.  Investors should not expect to follow the strategy intermittently and have a high probability of long-term gains.

How to Execute a Dogs of the Dow Strategy

Executing this strategy is very simple.  It should take place during the New Year holiday and it requires very little time. The way you pick the Dogs is very simple.

  • When the year starts, look at the top 10 high yield stocks in the Dow Industrials.
  • Invest equal amounts of money in all 10 stocks.
  • Hold onto those stocks throughout the year.
  • At the end of the year, do it all over again.

Some financial advisers and most financial websites have lists and files with all the relevant information. Even calculating dividend yields manually for all 30 companies is not very difficult or time-consuming.  The basic concept behind the Dogs of the Dow is that the high dividend yields stem from share price declines. Therefore, due to the cyclical nature of the business cycle, the Dow stocks with the highest yields — depressed share price — are more likely to reverse trend and offer asset appreciation over the subsequent 12-month period.

Furthermore, many of the Dow companies have predetermined dividend payout strategies and dividend payouts are generally far less volatile than share prices. Therefore, substantial share price declines will be main the drivers of significant dividend yield increases.

Dogs Dow Stocks

If one had bought the 10 highest-yielding stocks in the Dow Jones Industrial Average at the beginning of 2018 and held them all year long, it would have only lost 1.5 percent, versus the Dow’s nearly 6 percent annual loss and the S&P 500’s 6.2 percent.

Proponents of this approach recommend the Dogs as the best stocks to buy at the beginning of each year.   Hold them for twelve months.  At the end of the year, repeat the process. This investment strategy has beat both the Dow and the S&P 500 most years since 2000.  Between 2000 and 2016, the Dogs of the Dow returned 8.6% annually, while the S&P 500 garnered 6.2%.  Dow Industrials are arguably some of the highest quality stocks you can buy.  It is easy to see why many consider these to be 10 Top Stocks to Buy Now in 2019.

Dogs Dow ETF 

dogs-dow-etfAn ETF is a security that tracks a single index, for example the DJIA, S&P 500, or the Russell 2000.  An ETF can also track a commodity, a group of assets, or stocks. Buyers and sellers of ETFs pay a brokerage commission equivalent to the commission required to buy and sell a stock. While ETFs are similar to mutual funds, they offer the advantage of being available for purchase and sale throughout the business day.  This can be especially helpful when the market is volatile.  In general, ETFs tend to have lower expenses.  And with ETFs, investors can better control entry and exit points with the use of stops and limit orders.

There are only a handful of ETFs that invest in the Dogs of the Dow and none of them hold 100% “dogs”.  Dogs typically represent only around 50% or so of these funds’ portfolio holdings.

Dogs Dow Mutual Fund

dogs-dow-mutual-fundA mutual fund is a group of stocks and/or bonds that are bundled together and offered for purchase from an investment company. Many investors can then pool their money and each becomes a shareholder of the fund rather than a specific company or debt instrument.  Mutual funds are actually investments that kind of work like buying stock in companies. Investors buy shares into the mutual fund, which in turn gives them a claim to the fund’s assets and the profits from the investments the mutual fund makes.

The stocks and bonds chosen for each mutual fund are based on the stated objective of the mutual fund and each fund has a professional fund manager. Some mutual funds are based on market capitalization, others on particular industries, and some try to mimic the common stock indexes. The mutual fund itself is managed by a specific set of goals and objectives to minimize risk and maximize profits.

Mutual funds allow investors to have diversified portfolios without the high costs of trading stocks and bonds individually.  Investors need to pay close attention to the management fees for the various mutual funds and include those fees in their estimation of return.

Like ETFs, there are only a handful of mutual funds that invest in the Dogs of the Dow.  None of them hold 100% “dogs”.  Dogs typically represent only around 50% or so of these funds’ portfolio holdings.

Small Dogs of the Dow

small-dogs-of-the-dowPuppies of the Dow are a subset of the 10 Dogs of the Dow. They are the 5 stocks to buy from the Dogs of the Dow list with the lowest share prices.  Historically, this group has performed even better than a strict Dogs of the Dow investment strategy.  That makes these small dogs the Top 5 Stocks to Buy Now in 2019:

Small Dogs Dow List

CSCO     Cisco Systems                                                 3.0%      $43

PFE         Pfizer                                                              3.3%      $44

KO          Coca-Cola Company                                     3.3%      $47

VZ           Verizon Communications                             4.3%      $56

XOM      Exxon Mobil Corporation                              4.8%      $68

From 2000 through 2016, the Puppies of the Dow, earned a 10.45% annualized return. That’s more than 4% greater than the S&P 500’s annualized gain of 6.2% and approximately 2% above the 8.6% return of the standard Dogs of the Dow approach during that same period.

Historical Performance – Dogs of the Dow Strategy

Historical performance confirms that the Dogs of the Dow strategy performed well over extended time horizons. The strategy either performed at least as well as the overall Dow Jones Index or better and generally outperformed the S&P 500 Index. However, past performance is no guarantee of future success.  Also, this strategy is meant to be implemented for the entire year.  It may not be reliable over a shorter term.

However, the Dogs of the Dow strategy struggled to adjust to any extraordinary market disruptions, such as the 2018 financial crisis or the dot-com boom. In both of those instances, the Dogs of the Dow strategy trailed the Dow Index and needed longer to recover.

As is the case with all investment approaches, the returns don’t follow this pattern every single year. Between 2012 and 2016, both the Dogs and the Puppies of the Dow beat the S&P 500 each year. Yet, in 2016 the Dogs of the Dow beat the Small Dogs of the Dow. In 2017, the S&P 500 returned 21.64%, while the Dogs earned just 19%.

Bottom Line:  Top Stocks to Buy Now…

Dogs of the Dow represents one of the simplest strategies investors have used to try and outperform the broader market on a yearly basis.

There are only 30 Dow stocks, so it’s feasible to do the math yourself to find the dividend yields and then rank them in order, from highest to lowest.  However, a table has been provided above for your convenience.

The strategy has been back-tested as far back as the 1920s.  Investing in the Dogs consistently outperformed the market as a whole. Since that time, the data shows that the Dogs of the Dow as well as the popular variant, the Small Dogs of the Dow, have performed well.  This makes the Dogs of the Dow the Top Stocks to Buy Now in 2019.