Why the “Dogs of the Dow” Are Slowing Down

Are you tired of winning yet? Even though the market’s finishing out the year with a whimper, bulls are overjoyed.

Or, at least, they should be.

The S&P 500 soared almost 30% this year, marking the biggest yearly gain since 2013. Back then, stocks finally escaped the orbit of the 2008 financial crisis. In 2013, the market broke new ground for the first time since 2007, blowing past the highs of the “Dot Com” bubble of 2000 as well.

It was a momentous occasion for investors, but also somewhat expected from a post-crash market. By comparison, this year’s leap came along during the longest bull run in history.

Wall Street couldn’t believe it. CEOs, analysts, and the media had the U.S. pegged for recession. The S&P got crunched toward the end of 2018, and almost everyone thought the carnage would continue into the new year.

Instead, stocks went on one of their biggest “rip your face off” rallies of all time. Barely anything could stop the market from rising outside of a few trade war or tariff-related interruptions. Folks who bought-in on January 1st were treated to massive growth, underscored by a roaring economy and rock-bottom interest rates.

Sure, there were moments of significant stress (like the Saudi Aramco attacks or trade deal flip-flops), but in the end, equities overcame each and every obstacle. Over the last decade, the S&P and Dow have returned 13.5% and 13.3% average yearly gains, respectively.

And though those figures take into account 2019’s near-historic returns, both indexes have been outperformed by another group of stocks:

The “Dogs of the Dow.”

Chances are that you’ve likely heard of the Dogs, a popular investment strategy that prioritizes dividends. Since 2010, this selection of companies has returned almost 15% on a per year basis, slightly beating out the S&P and Dow.

In fact, the Dogs did better than the Dow in seven out of the last ten years. 2012, 2017, and 2019 were losers for the high-yielding stocks. This year, in particular, was rough, as the broader index gained 25% vs. an 18% return from the Dogs.

Overall, though, they did very well.

But will the Dogs continue to outperform the market?

Maybe, maybe not. Next year’s group includes Exxon Mobile (NYSE: XOM), International Business Machines (NYSE: IBM), Chevron (NYSE: CVX), Pfizer (NYSE: PFE), 3M (NYSE: MMM), Walgreens Boots Alliance (NASDAQ: WBA), Cisco Systems (NASDAQ: CSCO), Coca-Cola (NYSE: KO), Caterpillar (NYSE: CAT), and Merck (NYSE: MRK).

In the past, Dog stocks underperformed when equities had their best years. From 1998-1999 (the end of the “Dot Com” boom) and 2007-2009 (the Financial Crisis), the Dogs got shellacked.

2019 was another 12-month period where stocks went on an absolute tear. It’s no surprise to see that the Dogs couldn’t measure up based on their historical performance.

Since 1920, they’ve surpassed the market’s long-term gains. But these days, with modern, know-it-all investors, the Dogs have lost a significant amount of their “bite.” If 2020 is anything like 2019, we could see another down year for Dog stocks.

Especially if President Trump can check China off his “to-do” list – something that might coincide with his re-election campaign. If he can do that en route to securing a second term, bulls (not Dogs) are likely to have a big year.

No bones about it.


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