By: Jerry Nix | Freewavemaker, LLC

Date Published: September 25, 2023

Note from author: I used to use an investment strategy that worked so well and was so simple and made me a ton of money … but like most people, I got bored and tried to do other things that would make money faster. I’ve decided after losing much over the past couple of years trying new things that it may be a good idea to get back to the old things that worked better. This article will run for most of a year with monthly updates, so stay tuned.

What are Dogs of the Dow?

The Dogs of the Dow is an investment strategy that involves investing in the 10 highest-yielding dividend stocks in the Dow Jones Industrial Average (DJIA) each year. The strategy was popularized by Michael B. O’Higgins in a 1991 book and his Dogs of the Dow website.

The Dogs of the Dow strategy is based on the premise that blue-chip companies are more likely to maintain their dividends, even during economic downturns. This is because these companies have strong financial positions and established business models. Additionally, high-yielding dividend stocks tend to be undervalued by the market, which means that investors have the potential to earn higher returns.

To implement the Dogs of the Dow strategy, investors should simply buy the 10 highest-yielding dividend stocks in the DJIA at the beginning of each year. Investors should then hold these stocks for one year and then repeat the process.

The Dogs of the Dow strategy has a long track record of success. Over the past 50 years, the Dogs of the Dow have outperformed the Dow Jones Industrial Average by an average of 3% per year.

Normally, the Dogs of the Dow are determined at the close of business on December 31^st each year and the idea is to invest in these on the first business day of the year and hold them for one year – regardless of what happens. This is a “Buy and Hold” strategy that could help a person year after year capitalize on their investments without having to do a lot of daily trading. Since you will be holding these for a year, most people would reinvest dividends (free of charge) during the year to add to their positions without having to come out of pocket with new cash.

WARNING: I will not be reinvesting dividends in this portfolio as I am comparing two different kinds of investments (stocks and options) and options do not provide dividends.

Now if you set this up on December 31, 2022, the stocks that you would have bought this year can be seen as follows (I also included the year-end price and dividend yield for each of these stocks:

I have these posted based on the lowest to highest price on the last trading day of last year 12/30/2022. Notice the average dividend yield is about 4.506% per year, based on these prices.

The idea was to purchase all ten of these stocks on the first trading day of this year and hold them for at least one year (so that gains would be taxed as long-term vs. short-term) and then sell them and purchase next year’s Dogs of the Dow.

Again, the idea is to get index-like returns without having to purchase the entire index of 30 stocks.

Had you done this over the past 30 years you would have investment returns as follows (and this table compares the 10 Dow Dogs to the Dow Jones Industrial Average – dividends not included):

As you can see in the first ten years the Dogs of the Dow did not beat the DJIA. Nor did they the second 10 years. However, over the past 10 years, the Dogs of the Dow did beat the DJIA on average. During the 30-year period, you would have lagged the index average by about 2.68% per year (9.03% vs. 6.35%). However, let’s not forget the dividend yield on the stocks which last year was about 4.51% per stock on average.

What are the Small Dogs of the Dow (the Puppies)?

I call them The Puppies, but most investors refer to them as the Small Dogs of the Dow. Simply put the Small Dogs of the Dow is a variation of the Dogs of the Dow strategy that selects the five highest-yielding dividend stocks in the Dow Jones Industrial Average with the lowest stock price. This strategy is based on the premise that smaller companies may be more undervalued than larger companies and that high-yielding dividend stocks are more likely to outperform the market over the long term.

To implement the Small Dogs of the Dow strategy, investors should simply buy the five highest-yielding dividend stocks in the Dow Jones Industrial Average with the lowest stock price at the beginning of each year. Investors should then hold these stocks for one year and then repeat the process.

The Small Dogs of the Dow have historically outperformed both the Dow Jones Industrial Average and the Dogs of the Dow. However, it is important to note that this strategy is more volatile than the Dogs of the Dow strategy, as it includes smaller companies.

Here are the current Small Dogs of the Dow for 2023:

The idea was to purchase all five of these stocks on the first trading day of this year and hold them for at least one year (so that gains would be taxed as long-term vs. short-term) and then sell them and purchase next year’s Dogs of the Dow.

Again, the idea is to get index-like returns without having to purchase the entire index of 30 stocks – or even ten of the Dogs of the Dow.

Had you done this over the past 30 years you would have investment returns as follows (and this table compares the 5 Puppies to the Dow Jones Industrial Average – dividends not included):

Again, during the first and second 10-year periods, the Index would have beat the Puppies strategy in terms of return averages. In the past 10-year period the Puppies would have beat the index on average … but over the 30-year period, the Puppies would have under-performed the index (not including dividends you would have earned).

By reinvesting dividends over 30 years, you would have seen much better performance than what the above table shows for both the Dogs and Puppies of the Dow. Keep in mind also that the Dow Jones Industrial Average Index (DJIA) is a weighted index. This means stocks with a higher price get a larger weighting in the index over the stocks with smaller prices.

This is how it is explained in Google’s artificial intelligence program – BARD:

The Dow Jones Industrial Average is a price-weighted index, meaning that the weight of each stock in the index is determined by its stock price. This means that higher-priced stocks have a greater impact on the Dow’s value than lower-priced stocks.

The Dow is also a modified price-weighted index, meaning that its divisor is adjusted periodically to keep the index from being too volatile. The divisor is calculated by dividing the sum of the stock prices of the index components by a factor. This factor is currently approximately 0.152.

The weighting of the Dow Jones Industrial Index changes over time as the stock prices of the index components change. However, the top five stocks in the Dow by weight are typically:

• UnitedHealth Group (UNH)
• Apple (AAPL)
• Home Depot (HD)
• Boeing (BA)
• 3M Company (MMM)

These stocks currently account for over 20% of the Dow’s value. This means the remaining 25 companies make up 80% of the value.

It is important to note that the Dow Jones Industrial Average is only one measure of the stock market. It is a narrow index that includes only 30 large companies. There are many other stock market indices that track a wider range of companies and sectors.

An alternative …

and one that I’ve used successfully is to find the 5 highest dividend yields with the lowest priced stocks at the end of each month throughout the year and buy them the first day of the following month and hold them for one year. Sometimes you may be buying the same stocks and sometimes you may get one or two different stocks. But rest assured, you are using what is known as “dollar cost averaging” for your investments over the period of a year.

But, what about the options?

Well, what I did for a period of years that seemed to make me a lot of money was to purchase the options rather than the stocks. I did this because of the following …

• Risk is limited to the amount invested in the options so you know how much you can lose at the outset,
• Due to leverage your returns (as well as losses) as a percent of capital invested can be quite large,
• It’s rather easy to use money management techniques like Profit and Loss targets when putting options to use.

This is best explained by an example that I will run over the next 12 months. I plan to update this example each month (every 30 days) until the end of one year (approximately). You need to add your email to this blog to make sure you are getting these updates. Or manually come back to read it each month as you are notified of changes. You can add you email to my blog by simply filling out the box that I’ve put an arrow to below on my home page:

Simply put your email address in the white box (orange arrow) and then click on FOLLOW FREEWAVEMAKER (red arrow). This will notify you of each article as well as updates to this article that I post.

For now, let’s take a look at the portfolio I set up at about 9:30 Central Time this morning:

Notice that I purchased 100 shares of each of the Dow Puppies as shown this morning with the following symbols 🡪 CSCO, DOW, KO, VZ, and WBA. In addition, I purchased 2 Call Option Contracts on each of these that are At the Money (close to the current market price) which are due to expire on June 21, 2023 (about 270 days from now).

The idea is to show the returns (or lack thereof i.e., losses) on the stocks as compared to Call Options. The values you see above reflect the value of the investments about one hour after I purchased them. Overall, the portfolio was up 1.58% or $386.63 in the first hour.

• I invested $21,527 in 100 shares of each of the five companies
  • One hour later the stocks were valued at $21,611.63
  • For a gain of $84.63 or 0.393%
• I invested $2,896 in the 2 Options Contracts (100 shares each for 200 shares per company) in each of these companies.
  • One hour later the options were valued at $3,198
  • For a gain of $302 or 10.42%
• Overall, the portfolio that cost $24,423 was valued at $24,809.63 one hour later for a gain of $386.63 for a gain of 1.583% within the first hour.

The values you see below reflect the value of the stocks and options at the close of business today 09/25/2023:

As you can see, we ended the first day with a gain of 0.37% on stock and 8.36% on options with an overall gain of just 1.32% for the day.

Update due: 10/25/2023

Well we have been one month into this program and the update does not look as good as I would have liked it too.  However, true to my word I told you I would update this article on a monthly basis and I am going to do just that – regardless of how it looks to the average person.  

Before showing you the update of the portfolio, let’s take a look at the market itself for the past one month.  The three indices I choose to watch in my investment accounts are the Dow Jones Industrial Average ($DJI), the S%P 500 Index ($SPX), and the NASDAQ 100 Index ($NDX).  Three charts are below from each of these in order.

$DJI

As you can see from the above; over the past 23 trading days (one month) the Dow Jones has been up 11 days and down 12 days. Pretty rocky to say the least. When a bar is solid that means the day closed lower than it opened in (all the red bars) and when it is open it closed higher than what it opened at for the day (all but two of the green bars). On 09/25/2023 the Dow closed at 34,006.88 and yesterday on 10/25/2023 it closed at just 33,035.93. Overall during this trading period the Dow lost 970.95 points or 2.85%.

$SPX

In this graph of the Standard and Poor’s 500 we see that it also was up 11 days and down 12 days. During this trading period the S&P fell from a close of 4,337.44 on 09/25/2023 to a close of 4,186.77 on 10/25/2023 for a loss of 150.67 points or 3.47%.

$NDX

During the same 23 trading days (one month) the NASDAQ 100 (which is 100 technology companies) had 13 Up Days and only 10 Down Days. The value, however fell from a closing value of 14,768.90 on 09/25/2023 to 14,281.64 on 10/25/2023. This would be a decline of 487.26 points or 3.30%.

Needless to say we had a lot of things going on in the country during this time that had some NEGATIVE impacts on the market.

1. We had a government on the verge of a shut down and the democrats and republicans had a very hard time working across the isle to put stop gap measures in place in our budget and spending … and when they did put a plan in place they knew it was a short-term plan that was only good for about 45 days. TOTAL IDIOTS!
2. Shortly after the budget was passed to keep the country going for a month and a half the house decided to fire the speaker (thank you Matt Gaetz and Conservative Caucus). It was a constant battle for 3 of 4 weeks to put someone in his place (and this was not accomplished until yesterday)
3. Then on top of all this … 19 days ago Hamas of Gaza decided to attack Israel with the help of Iran in hopes to start World War III. That battle has been raging for about 63% of the time over the past 30 days.
4. In addition to all the governmental lies … the yield of the 10 year treasury has exceeded 5% a couple of times and some investors wonder why they should risk money in the markets when they can get a guaranteed 5% return on invested assets of the government. Oh, if they only understood that the government is going to have to borrow more money (or print more money) just to pay the interest on that debt – not to mention our national debt of over 33.6 Trillion Dollars.

Is it any wonder we have had crazy markets. But, hold on, we’ve always had crazy markets and increasing rates of inflation for years upon years. It always has been and it always will be. Don’t let the lying politicians and the crazy economy scare you out of the market. You will only be sad in the future. And, especially stay away from the “talking heads” on TV and FACEBOOK. They try to predict what is going to happen and are wrong more than they are right. Mr. Market is going to do what Mr. Market is going to do. The question is will you be there to take advantage of it.

Now let’s take a look at the Puppy Portfolio:

Keep in mind on this portfolio we are comparing 100 shares of stock to 2 long-term call contracts (200 shares) of the stock. I’ve listed the stock and then the option on the left side of the table. The stock % change is the is the first column on the right. As you can see with CSCO, DOW and KO the stock is down and he options are down a greater percentage. Whereas with VZ and WBA the stock is up and the options are up quite a percentage greater. This is what leverage does. The upside is higher on the options than the stock and the downside is greater on the option than the stock. The key is with the option at such a small cost … even if you lose 100% of it you have less to lose than losing 10% – 100% of the stock in most cases.

As the table (see bottom) shows. The value of the stock has dropped $465 from the closing value on 09/25/2023 a drop of 2.15%. The stock gave up $385 from the original cost of the stock … which is a drop of only 1.79%. Remember that during the same period the indices fell by 2.85%, 3.47% and 3.30% respectively. So, by purchasing the five worst stocks out of the 30 in the Dow Jones Industrial Average you would have still “Outperformed” the stock market over this period of time (for those conservative investors).

However, since 09/25/2023 the options gave up $520 in gains based on the closing value of 09/25/2023 vs. 10/25/2023 – which would be a loss of 16.57% from the closing value on 09/25/2023. Currently though based on the closing value last month as compared to this month the options are down 9.60%.

Now if we look at the total portfolio, the cost was $24,423 and the closing value was $23,760 yesterday for a total loss of just $663 – which does not become a REALIZED loss unless we sell it. Right now it is just an Unrealized loss of 2.71% which means we are still outperforming the market on the downside of things.

Hopefully, if the lying politicians can do something good … we may be able to report better numbers next month. For now … HOLD ON!

Next Update: 11/25/2023