Its that time of the year again. Everyone is festive and joyous and optimistic but maybe not for the reasons you think. Everyone is excited because its Dogs of the Dow time! You see every year investors from all over close their current Dow dogs positions and generate the new list.

The Dogs portfolio is so fascinating because its a rules based strategy where you only trade on just one day of the year, the first trading day of each year, and then you enjoy your index fund beating returns (usually).

2021 LIST OF DOGS

Before we get into what the strategy rules are, how it works, and how you can use it let start by announcing this years list of dogs.

So there you have it, that’s the list of 2021 Dogs of the Dow. Stick around and I will walk you through how the strategy works and how to properly implement it and be sure to subscribe so you can follow the performance of this portfolio with me throughout the year.

DOGS HISTORICAL PERFORMANCE

If you watched last year’s Portfolio Challenge Results video then you already know that the Dogs of the Dow had a pretty bad year in 2020. It lost around 13% where-as the S&P 500 Index finished up around 14%. The dogs don’t always win every year and 2020 was definitely a bad year.

However if we compare the 5, 10, and 20 year returns the Dogs wins by about 200 basis points. I know 2% annual alpha doesn’t seem like much but compounded over years it can amount to a substantially large sum of money.

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DOG RULES

One of the most appealing aspects of this strategy is that its rules based. There’s only a few simple rules to follow and, other than on that one day per year, you are not trading or actively managing any positions.

You are gonna want to use a stock screener to do this, I recommend FinViz.

First In the Screener, set the Index to DIJA, which is the Dow Jones
Next you need to click the Financial tab
And then sort the grid by dividend, descending. You will need to click the dividend column twice to sort descending.

Rule #1: Order all stocks in the Dow Jones Industrial Average by Dividend Yield (highest to lowest)

Rule #2: Purchase the 10 highest yielding stocks in the screen in equal weight, 10% each

Rule #3: Hold these stocks for exactly 1 year and 1 day and then rebalance into the next years dogs by repeating steps 1 & 2

Throughout the year do not buy or sell any of these positions. Dogs purists usually save their money throughout the year in high yield savings accounts or money market funds and then make one big trade using all the cash they saved throughout the previous year on the first trading day of each year.

WHY DOES THIS WORK?

The reason the dogs strategy works so well is because it piggy backs on top of the Dow Jones Industrial Average. The Dow index has an interesting backstory that I won’t get into in this video, please let me know in the comments if you’d like me to make a video on the Dow’s history

What you really should know about the Dow Jones is this:

The Dow Jones Index was created by Charles Dow who also created Dow Theory, also known as technical analysis
Charles Dow also created the Wall Street Journal and the Wall Street Journal is responsible for managing the Dow Jones Index
Unlike most indexes, the Dow is price weighted, not cap weighted so this means that the Wall Street Journal has to constantly rebalance the index to account for the wide price variation between stocks
In order to be considered for inclusion in the Dow index a company must pay a dividend**. That’s why companies like Amazon and Google are not in the Dow.

_{** On 8/31/2020 Salesforce, Inc (ticker symbol: CRM) was added into the Dow index and it does not yet pay a dividend.}

Since there are only 20 stocks on the Dow Jones and all those stocks have been heavily vetted by the Wall Street Journal, the dogs strategy benefits from having a fairly decent pool of stocks to pick from.

The idea of the strategy is that stocks in the Dow that are doing poorly don’t do poorly for very long so if you buy the ones that are the worst performers then the odds that they will bounce back is high. An added benefit is that their dividend yields are typically really high so you have the chance for a double whammy (both high dividend and capital gains)

HOW TO INVEST IN THE DOGS

The dogs should be equal weighted. 10 companies with each position being 10%. If you use the M1 Finance Brokerage then its really simple to play around with strategies like this since you can just add them as a small slice within your overall pie. You can add the Dogs portfolio slice into your M1 Finance pie here (click the Invest in this Pie button).

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FINAL THOUGHTS

I personally really like the Dogs of the Dow, even though it got killed in 2020. I’d be interested to hear what you guys think about this strategy.

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Here’s Your 2021 ‘Dogs of the Dow’ companies