Here is a Simple Rules-Based Investment Strategy: The “Small Dogs Portfolio” - Local Wealth Professionals

Well we are always on about using rules-based investment strategies and investing in the Dow Dogs is certainly one of those.  Also, its really simple!  You do not need an MBA to implement this strategy.


Well lets start with what is the “Dow 30”?  The Dow 30 is a group of stocks which make up one of the most closely followed indexes in the markets. 

The Dow Jones Industrial Average was created as a Corporation in 1896.  Over time, it came to consist of 30 stocks which represented a basket of some of the highest quality companies in a broad range of businesses in the US.  The names change infrequently, but when one of the “industrial giants” falters it gets replaced.  As an example, mid year in 2018 GE was removed to be replaced by Walgreen Boots Alliance.

The Dow Dogs are simply the 10 highest dividend payers amongst the current Dow 30.  The investment strategy that ensues is to select these 10 stocks at the start of the year and look at the portfolio again at year end, make adjustments at that time and let it ride anew for another year.   It’s not a very exciting strategy, but it is one that has beat the underlying Dow 30 pretty consistently:  for example, since 2001, the strategy has delivered an annual return of 9.5%, including dividends, vs 7.3% for the Dow 30.  Even last year (2018), which did not look that great, was a good year for the “dogs” vs the “Dow”: the Dogs may have lost 1.5% but the Dow lost 3.5%.

One of the secrets of the Dow Dogs is the dividend return:  it makes up an important part of it:  for example, the annualized dividend yield for the 2019 Dogs will be around 3.15%.

But what if we could sweeten up what already looks like a good thing? 

Welcome to the “small dogs”:  this is an even easier portfolio to manage as it consists of only 5 stocks – the 5 cheapest of the 10 Dogs!  For 2018 those stocks were Verizon, Pfizer, Coke, Cisco and GE.

In many cases, the reason why a stock becomes a Dow Dog is that it has got into a bit of difficulty, causing its price to fall causing the dividend yield to go up.  So, it becomes a sort of natural selection process for value stocks.  By then selecting the 5 cheapest of the 10 highest yielders, it refines that search a bit more – but also adds the possibility that one or more of those stocks might be in bigger trouble.  In 2018, that was exemplified by GE – which started the year as a Dow Dog and left the Dow by mid-year.   Anyone following this model would sell any stock that was removed from the index.

So how did that fare in 2018?  Well embarrassingly well:  granted GE was a disaster and got banished.  But the other 4 stocks carried their weight and more.  In fact, the small dogs generated an enviable annual return, including dividends of… 22.27%!  Wow.  And that was in a market where the DOW was underwater by about 3.5%.

This is NOT an advertisement for the Small Dogs.  This is an advertisement for the idea that having a discipline which takes the emotion out of the investment process and sticking to it is a good investment strategy. 

By the way, for what it’s worth, the Small Dogs for 2019 are the same as last year, with GE being replaced by Exxon – and remember that PAST PERFORMANCE IS NO PROMISE OF FUTURE RETURNS!

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We hope you enjoy our course and the articles we post.  They are intended to be for your education and entertainment and not to be construed as any form of investment advice.  Any examples we offer are illustrations to clarify the information provided and should not be applied in real case situations without consulting with a competent investment professional.

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