Last year was one of the worst ever for the Dogs of the Dow strategy for picking dividend stocks.
This strategy, for those of you unfamiliar with it, calls for investing each year in the 10 stocks within the Dow Jones Industrial Average with the highest dividend yield on Jan. 1. The strategy is elegant and simple, calling for portfolio changes just once per year, in early January, and doing nothing else.
It became even simpler still in 2007, when an exchange-traded note was created that did for you that set of once-a-year transactions. This was the ELEMENTS Dogs of the Dow DJ High Yield Select 10 Index (DOD) - Get Report.
The Dogs of the Dow strategy was quite popular in the 1980s, the 1990s, and the early 2000s, based on an enviable track record up to that point. But its popularity has waned over the past decade, and the DOD exchange-traded note closed in April 2019.
Yet the strategy continues to have a group of devoted followers, to whom 2020’s experience came as quite a shock: The strategy suffered a nearly 8% loss, in contrast to an 18.4% return for the S&P 500 and a 9.6% return for the Dow Jones Industrial Average. (These returns assume dividends were reinvested.) Negative alphas of over 26 percentage points (relative to the S&P 500) and of nearly 18 percentage points (relative to the DJIA) are quite noteworthy.
But it’s not particularly surprising to followers of my investment newsletter tracking service (the Hulbert Financial Digest, or HFD). Several advisory services over the years have inaugurated model portfolios to follow the Dogs of the Dow strategy, and the HFD had shown that they lagged the market over the long term. Not only did they make less money than a simple index fund, these model portfolios were significantly more volatile -- or risky. This meant that the strategy was even less compelling on a risk-adjusted basis.
For those of you interested in creating a portfolio of dividend stocks, the best-performing of the dividend newsletters my firm currently follows is Investment Quality Trends, edited by Kelley Wright. I refer you to a column I wrote about Wright’s methodology in late 2019 if you want to understand the specifics of his approach. In 2020, his “Timely Ten” portfolio, the model portfolio of Wright’s that is most analogous to the Dogs of the Dow, gained 11.1% --19.1 percentage points better than the Dogs of the Dow.
(Disclosure: Investment Quality Trends is one of the newsletters that pays my company a flat fee to have its performance audited. Note that, because of this flat-fee arrangement, there is no incentive to make any newsletter appear better than another.)
Wright’s portfolio has come out ahead over the longer term as well. The HFD has been auditing his “Timely Ten” portfolio since late 2006, and from the end of that year through year-end 2020, it has produced a 10.7% annualized return — versus 7.3% for the Dogs of the Dow.
Below is a list of the stocks in Wright’s current “Timely Ten” portfolio. Note that none of its holdings is in the Dogs of the Dow portfolio for 2021:
Bank of New York Mellon
Philip Morris Int.
Raymond James Financial
Reliance Steel & Aluminum Co.
State Street Corp.
Tyson Foods Cl A