Finding the best, most reliable, and highest dividend stocks the market has to offer doesn’t have to be a chore. Let the winners step forward and do all the work! All you need is to use a well-known stock picking method known as the Dogs of the Dow investment strategy.
The Dogs of the Dow is based on two simple premises: 1) Out of all the dividend stocks out there to buy, the top performing blue chip companies from the Dow Jones Industrial Average will be your best bet for producing stable returns. 2) By buying the highest dividend stocks while the yield is high, you’ll likely be buying them at a time when the price is low and likely to go higher (the old buy low, sell high mantra).
How the Dogs of the Dow Gets the Highest Dividend Stocks:
The Dogs of the Dow strategy is very easy to follow. It works simply like this:
1. On the last day of the year you make a list of all the stocks in the Dow.
2. Order the list by highest to lowest Dividend Yield Percentage.
3. On the first day of the year, buy an equal dollar amount of the top ten highest dividend stocks. These will be your “dogs” for the Dogs of the Dow.
4. Hold the portfolio for one year.
5. At the end of the year, repeat Steps 1 –4 and reinvest any dividends you received.
As an alternative to Step 3, you could also just buy an equal portion of only the top 5 lowest priced stocks within this list of the 10 ten highest dividend stocks. This version is called the Small Dogs of the Dow.
Dogs of the Dow Past Returns:
So how has the Dogs of the Dow strategy performed over the years? The table below is courtesy of dogsofthedow.com. The figures assume that the dividends have been reinvested and do not include commissions or taxes.
In most instances, both the Dogs of the Dow and the Small Dogs of the Dow beat the market indexes (the Dow Jones and S&P 500). However, because your diversification is lower, you also run a higher risk of greater losses during the bad years. As with all stock picking strategies, there’s a lot to consider.
What Does It Cost to Buy the Highest Dividend Stocks?
The great thing about the Dogs of the Dow strategy is that it is a no-brainer to put together. There’s no research necessary and all the information you need is free. You could manually put together the list of candidates from the Dow Jones yourself, or check out the above website anytime to see which stocks qualify. From there, all you need to do from there is have a brokerage account ready to go!
At worst case, you’d probably sell all 10 of your Dogs of the Dow stocks at the end of the year and then buy them again the next day. That’s 10 transactions x 2 = 20 transactions. For the cheapest results, try to use a discount broker like Options House at around $4 per trade. That would be a total cost of $80 per year to implement the Dogs of the Dow strategy.
The Small Dogs of the Dow is an even cheaper alternative. Again, worst case, you’d have 5 transactions x 2 = 10 transactions for a grand total of $40 per year.
To shelter yourself from taxes, consider using an IRA or other tax-advantaged account. Don’t let taxes nip at your dogs!
The Dogs of the Dow Will Part of My Strategy Next Year:
I love it when you re-read a book and learn something completely new. I was (re) introduced to the Dogs of the Dow investment strategy this summer while I was re-reading The Neatest Little Guide to Stock Market Investing by Jason Kelly. Although I had read the book several years ago, it was a pleasant surprise to rediscover this theory in light of my new affirmation for dividend stocks.
This year, I bought a number of the highest dividend stocks I could find. I was specifically targeting the Dividend Aristocrats (another strategy we’ll review another time). But after more research, I’m convinced that the Dogs of the Dow may be a better and more stable approach. So I plan to use it (or the Small Dogs of the Dow) next year.
Readers – What do you think about the Dogs of the Dow investment strategy? Has anyone heard of this or had any experience with it? What is your opinion of buying blue-chip stocks from the Dow Jones Industrial Average; pretty smart?