This week, Durig Capital reviews its own version of a time-proven investment strategy. The Dogs of the Dow investment strategy is a simple way for investors to design a portfolio around the “dogs” of the broader Dow Index, and rebalance it annually. Durig Capital’s Dogs of the Dow (DoD) portfolio has, since its inception in June 2017, resulted in a less volatile portfolio with excellent returns when compared the the broader Dow index. An updated look at this portfolio reveals:
- Since inception, this portfolio has outperformed its benchmark index, the Dow Jones Industrial Average (DJIA), with a 15.04% return versus an 11.99% return.
- In a down market, the DJIA index was down 60% more than the Durig’s DoD portfolio.
- For the period 6/6/2017 to 5/13/2019, Durig’s DoD portfolio had an alpha value of 5.97 and a beta value of 0.69, which means it not only outperformed its benchmark, but it did so with significantly less volatility.
By overweighting the “top dogs” in its DoD portfolio, Durig Capital has designed a portfolio with historically solid returns and reduced volatility, a winning combination for investors looking to maximize their income while minimizing their downside risk.
Dogs of the Dow Investment Philosophy
Introduced by Michael B Higgins in the early 1990’s, the investment philosophy behind the Dogs of the Dow designs a portfolio using longstanding, blue-chip companies that have consistent long-term returns. All of the companies in a Dogs of the Dow portfolio come from the greater Dow Jones Industrial Average (DJIA), an index made up of 30 significant stocks trading on both the Nasdaq and New York stock exchanges. The companies that make up the DJIA have historically made significant contributions to overall market direction. This investment strategy seeks to further refine that information to choose which stocks are most likely to outperform the greater market over the coming twelve months.
The strategy itself is fairly straightforward. On the the last trading day of the calendar year, the 10 Dow stocks with the highest dividend yields are selected and the investor invests equal amounts into each of those stocks on the first trading day of the following year. For the rest of the year, the portfolio remains unchanged. At the end of the year, the process is repeated and the portfolio rebalanced and reinvested. Like many investment strategies, this is not a guarantee to outperform the DJIA – some years it does well and in others this strategy underperforms. Over the long term, however, the gains are enough for investors to continue using this strategy. Below are the returns between 2000 and 2014.
The basic concept of this portfolio strategy is that high dividend yields are a result of declines in share price. Through the ups and downs of the business cycle, these high yield stocks are more likely to experience increased share prices over the following year. Also, the dividend payouts from these companies are generally less volatile than the associated share prices. Therefore, a main driver of increased dividend yields is a substantial decline in share prices.
Almost two years ago, Durig Capital created its own Dogs of the Dow Portfolio, putting its own spin on the original investment philosophy. Instead of 10 positions, Durig’s portfolio has 9 positions, with the “top dogs” significantly over-weighted. This gives greater exposure to the equities with the highest yields. The top yielding equity gets roughly double the amount of the lower yielding equities.
Dogs of the Dow YTD Performance
Wondering how the “official” Dogs of the Dow list for 2019 has fared so far? Here are how the individual equities have fared so far this year (as of May 15, 2019).
|Ticker||Name||Starting Price||Starting Yield||YTD Performance||Current Price||Current Yield|
|IBM||Int’l Bus Machines||$113.67||5.50%||18.11%||$134.25||4.86%|
|JPM||JP Morgan Chase & Co.||$97.62||3.30%||13.26%||$110.56||2.90%|
|PG||Proctor & Gamble||$91.92||3.10%||16.10%||$106.72||2.83%|
|MRK||Merck & Co.||$76.41||2.90%||1.90%||$77.86||2.84%|
(Source: The Dividend Pig)
An Update on Durig Capital’s Dogs of the Dow
Let’s look at how Durig’s version of the Dogs of the Dow Portfolio has stacked up against the greater Dow Jones Industrial Average (DJIA).
- Between June 6, 2017 and May 13, 2019, Durig’s DoD portfolio returned 15.04%, compared to the greater Dow index return of 11.99%.
- For the same period, Durig’s DoD portfolio also outperformed the S&P 500 index, which returned 9.83%.
- Durig’s DoD portfolio also showed less volatile swings during that same period as compared to the greater Dow index. In a down market, the DJIA was down a maximum of -11.30%, where Durig’s portfolio was only down by -7.09% in comparison. The DJIA was down 60% more than Durig’s DoD portfolio.
- While Durig’s portfolio did not suffer to the extent of the DJIA index in a down market, did it forfeit return on the upside when the market is humming along? The short answer is yes, but it only came up 8% less, which is admirable considering the portfolio showed significantly less downside than the greater index.
These statistics illustrate a key feature of Durig’s portfolio – it has less volatility than the greater Dow index. Although the upside for this portfolio has lagged the DJIA year-to-date in 2019, it has been shown that this portfolio has significantly less volatility while outperforming its benchmark over the past two years.
Durig’s Dogs of the Dow Alpha and Beta
Alpha tells you how well a mutual fund or similar investment performs compared to the stated benchmark it’s trying to beat. Durig’s Dogs of the Dow portfolio’s most recent alpha (for the period June 6, 2017 to May 13, 2019) is nearly six points (5.97) over the Dow Jones Industrial Average. In addition to outperforming its benchmark index, Durig’s portfolio did so with significantly less volatility, with a beta measurement of 0.69 as compared to the DJIA (for the period June 6, 2017 to May 13, 2019).
Possible Limitations for the Dogs of the Dow Investment Strategy
While the Dogs of the Dow investment philosophy seems simple, some would argue its limitations or criticisms. First, an investor needs to rotate the portfolio stocks each year. While some of the portfolio’s equity positions might remain the same for more than one year, there will likely be changes in some of the holdings. This rebalancing (selling and buying) could trigger short-term capital gains for shares held less than one year. For equities held over several years, at the point of sale, if it is in a taxable account, long term capital gains will be due, thereby lowering your total return.
Another argument has to do with the fact that higher dividend paying stocks mean higher taxes for the account holder. If the portfolio is not held in a tax-sheltered or tax-deferred account (like a retirement account), dividends would be recognized as income, thereby triggering additional income tax to the account holder.
Finally, some investors do not consider a portfolio of only 10 stocks as properly diversified and would argue this creates additional risk. However, as illustrated by the historical returns between 2000 and 2014, this strategy beat both the broader Dow index and the S&P 500 in that time frame.
Summary and Conclusion
The Dogs of the Dow strategy is just one of many investment strategies that investors can use in pursuit of a balanced risk / return portfolio. Durig Capital’s unique spin on this strategy continued to outperform the broader Dow index as well as the S&P 500 since June 2017, all with less risk than each of those indexes. Investors looking for increased returns with less volatility might do well to consider Durig’s Dogs of the Dow Portfolio.
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Disclaimer: Please note that all yield and price indications are shown from the time of our research. Our reports are never an offer to buy or sell any security. We are not a broker/dealer, and reports are intended for distribution to our clients. The high yield strategies presented in this review by Durig Capital may not be suitable for all investors. This is not investment advice from Durig Capital, nor a specific recommendation to buy or sell securities. If you have any questions or concerns about its suitability for your personal investment, you should seek specific investment advice from a registered professional before making an investment decision.
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