Dogs of the Dow Get Bitten

Storied value play, usually a can’t-miss strategy, falls afoul of the recession and oil bust.

The Dogs of the Dow strategy thus far this year is dogging it. This means that the value-oriented subset of the 30-stock Dow Jones Industrial Average (DJIA) has lost more than the overall DJIA amid the coronavirus-driven stock slump—and despite the recent partial market comeback.

The 2020 score through last week, on a total return basis (stock price change plus dividends), according to Bespoke Investment Group, is: The Dogs are down an average 19.4%, and the DJIA in toto has lost just 16.2%. That 3.2 percentage point deficit demonstrates that some of the Dogs have nasty problems.

The Dogs strategy is to buy the 10 stocks in the Dow 30 that have the highest dividend yields at the start of each year. In 1991, money manager Michael B. O’Higgins hatched the Dogs of the Dow theory: Holding the biggest dividend yielders usually means the 10 worst-performing, yet the key is that they are likely to rebound.

One reason is that  the DJIA companies are picked in part on the basis of their stability. Meaning, an eventual Dogs recovery is a foregone conclusion, most of the time. Their alluringly high dividends are another factor in their long-term positive record. The strategy doesn’t always work, but it does often enough.

In the 11 post-recession years, starting with 2009, the Dogs were ahead of the full DJIA for eight of them. In 2019, a good year for stocks, the Dogs did respectably, up 15.6%, but the overall Dow forged to the lead with 22.4%.

And this year?

The Dogs list happened to be burdened with companies that are suffering from the oil price plunge: Exxon Mobil, down 37% this year, and Chevron, off 28%. Another clunker is Dow Inc., the chemical producer, whose shares have fallen 40%. One would think that lower petroleum prices—oil is a prime component of chemicals—would be a good thing for the company. The trouble is that the ebbing industrial bases in the US and around the world don’t need a lot of chemicals right now.

Dividend plays aren’t in vogue lately. The Dividend Aristocrats, a group of S&P 500 companies that have increased payouts religiously for 25 straight years, are now trailing the overall index, Bloomberg data indicate.

Of the non-Dogs, all save three of the 20 are in negative territory. Boeing is the worst of them, with a 60% decline. The aerospace giant has been hammered by the grounding of its 737 MAX and the decline in air travel, which has called future deliveries of it planes into question. What’s more, it suspended its dividend in March, a real investor turnoff. Johnson & Johnson, Walmart, and Microsoft are the lone three DJIA stocks that are up this year. 

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