Dogs of the Dow Theory

January 12, 2024No Comments


Today I’m going to talk to you a little bit about the ‘Dogs of the Dow Theory’ and how we might improve our odds of success by picking stocks [00:01:00] out of that list. I’m going to share a PowerPoint presentation with you that will help you understand how the Dogs of the Dow Theory works, how it’s performed over the long run, and why it can be used for creating a list of stocks that you might want to take a look at and consider for your possible investment analysis.

Now, the theory does [00:01:30] involve using all 10 (or 5) stocks that come up at the end of every year by using their screening criteria. All you do is you buy those 5 (or 10) stocks and then you hold them for the year, and then you replace the stocks that are no longer on the list the following year. And if you do this year-in [00:02:00] year-out, it has actually performed better than the Dow Jones Industrial Average over time.

The Dogs of the Dow Theory Breakdown

So, I’m going to go right to the PowerPoint and start off by giving you an idea of how the ‘Dogs of the Dow 10’ have performed, then I’ll explain the difference between the ‘10’ and the ‘5’. I want to talk to you about how the 10 have performed over the past 23 years.  [00:02:30] And, then how the Dogs have performed by using the small number, the “Small Dogs” it’s called, which are the 5 stocks.

So, if we look at the Dogs of the Dow 10 since 2000, it’s made an annualized return of 9.9%, as of the end of 2023. [00:03:00] If we look at the ‘Small Dogs’ as they call them, which is the lowest-priced 5 of the 10 highest-yielding stocks, it’s actually done better than the 10 by performing at 12.1% on average since 2000. So, this is pretty good because the Dow Jones Industrial Average itself only performed at 7% as you can see on this slide. But a couple of things I want you to remember is that [00:03:30] in some years the Dogs of the Dow strategy underperforms. In fact, there have been a couple of times where there is a string of years. We’re going to look at that in the last slide today.

So, it’s a good way of looking at stocks, when searching for value, but we do need to further refine it a bit. Now, the data I just gave you is courtesy of dogsofthedow.com and that website’s been around forever. They [00:04:00] have all their statistics and tell you the exact stocks they’re buying every year and how they’re doing and all that wonderful stuff. So, how the Dogs of the Dow are created is the 10 highest-yielding stocks at the end of the year close, are taken out of the Dow 30, and they’re called the “Dogs of the Dow”. That’s the 10. So, we’re going to look at the 10 highest-yielding stocks, and we’re also going to look at the 5 lowest-priced stocks of those 10, and they’re called the “Small Dogs”.

stock price table - Dogs of the Dow Theory

So, let’s look at the 10 stocks, but I want to look at them with an eye on their charts because I am a believer that if we go into a bearish market, we may end up [00:05:00] in one of these years where the theory may end up being an underperformer as it has a few times through history. The next slide is the list of these 10 stocks. And you’ll notice I’ve got the symbol on the left side. Then we’ve got the stock name, the year-end price, the year-end yield, and then whether they are Small Dogs-eligible. And what that basically means is, are they [00:05:30] one of the 5 lowest-priced of the 10? You can see there’s some big names on this list and that’s because they’re Dow stocks.

Dogs of the Dow Theory Walgreens, Verizon and Coca-Cola

WBA chart Dogs of the Dow Theory

So, we’ll go to the first chart, which is Walgreens. And if we look at this chart, you can see it has had a [00:06:00] bit of a struggle as by the way, so has a competitor CVS, which is not on the list but is worth mentioning. You can see Walgreens is trying to base, I didn’t draw lines on this, but you can see at the bottom there’s a cluster through the latter quarter of 2023. It rallied strongly in December along with that stock market rally, but it has pulled back sharply. Two points might be a neckline. So, my thoughts on this chart are, I would want to see if this [00:06:30] neckline is going to hold before I bought, but it’s an interesting-looking bottom formation. It might work out to be okay.

Alright, next of the 5 cheapest stocks is Verizon. And you can see it’s just coming into resistance at a level somewhere right around where it is right now, around $40. It needs to penetrate that, but it has lots of upside if it does manage to penetrate it.

The next of the 5 lowest-price stocks [00:07:00] is Dow Holdings and Dow Chemical. And you can see that Dow Holdings – D-O-W on the US markets – has been pretty sideways since 2021. It’s been very range-bound and you know me, I like sideways stocks, I like stocks that go up and down in a range. This certainly does seem to have a range from around $45-$46 on the low end, and it seems to top out it’s somewhere in the $55 or [00:07:30] so level, not a bad range. It’s near the top of that range as you can see.  I don’t know that I would buy this stock right now.

Another example of a similar range-bound stock is Coca-Cola, and you can see it’s approaching the top of its range, which lies around $63. So again, this is what I probably would be crossing off the list at this point, even though we may see $2 or $3 more dollars on the stock, I don’t think it’s worth making 5% on Coca-Cola if it’s going to find that same lid that it has discovered [00:08:00] many times since 2022.

 

Dogs of the Dow Theory – Cisco, 3M and IBM

Alright, Cisco. Cisco Systems – a tech stock. It’s funny, I’ve been doing this since 1990, so I’m now in my 34th year, but for the first 10 years in the business I was a stockbroker and Investment Advisor. [00:08:30] I had a client and we were buying and selling Cisco way back in the late ‘90s.  He didn’t understand that the stock’s name was Cisco, even though I kept correcting him when he called it ‘Crisco’, just like the lard that you cook with. So, Crisco or Cisco – call it what you will – does seem to be in a little bit of an uptrend. Higher highs, higher lows.  This [00:09:00] old high is going to have to be taken out, but it might have a chance of rallying back to that high. So maybe this is one I would consider on the list.

Here’s another interesting one. This is the 5th in the low-priced 5, 3M. Now this is a name that’s been around a long time. In fact, most of the Dow stocks have been around [00:09:30] for a long time. 3M has been in a downtrend, and you can see if I were to draw a trendline here, it’s attempting to break that downtrend, and there’s quite a bit of resistance here. That might be a lid. It goes right across at around 105, and it’s just barely breaking that right now. In fact, there’s some [00:10:00] trouble up ahead at around 110, which is where it is right now. If 3M breaks 110, I’d actually think that this is a pretty good-looking chart, but it needs to break the 110 definitively for multiple days before I get too excited. The break of a downtrend is always a good thing and it’s definitely looking like it’s trying to do that. I would really keep an eye on 3M.

So, now we are out of the low-priced 5, and we’re on to IBM. [00:10:30] It’s interesting how this stock made the list, but I guess it has to do with the yields and IBM is definitely not in a downtrend. It was in a gently rising trend. And then, likely because of their involvement with AI and all that stuff, they’ve had some upside in the last quarter of ‘23. It’s a little overbought. You can see that with all the white candles. There’s a level of [00:11:00] old resistance that it broke there. This is a very good chart. I would think it would pull back a bit, but I think IBM should be watched for a pullback. It might be a very, very good stock to buy.

 

Dogs of the Dow Theory – Chevron, Amgen, and Johnson & Johnson

Okay, Chevron. A good oil & gas company, and they’ve been in one of these trading ranges since 2022. Again, you know the drill, I like buying and selling within ranges, but not necessarily buying and holding. So somewhere around [00:11:30] the $140, which is pretty close to where it is right now, is not a bad buy point. And then a sell point is around $170 to $175. So that’s a trader, and it’s probably an okay stock to take a look at. Again, you should do your fundamentals on these stocks. I’m strictly looking at the charts.

Now, Amgen, it’s broken out. That’s a pretty clean-looking chart. There’s an old lid there around [00:12:00] 280 that it broke. Big white candle may pull back a bit, but generally speaking, all-time high breakouts are very, very good. So. that’s definitely one that I would be taking a look at.

Now, Johnson & Johnson is a sideways-looking chart, but my problem with this chart is that its most recent low broke, a last significant low, which was lining up with other lows since 2021. You can go way back here. [00:12:30] And that low point used to be somewhere around $150. It actually reached about $140-something. So it does seem to be trying to rally back. It might be an interesting one to play up to $170-$175, but there’s a little more risk on this one. So, it’s probably worth taking a look, but keep in mind that you will want to do your fundamentals on this before you buy it.

 

The Dogs of the Dow Theory Stock Performance

Alright, so [00:13:00] that’s the list. That’s the 10 stocks. There was a couple in there that I didn’t mind at all. So, I want you to keep in mind that the Dogs in most years outperform the Index. So that’s a good reason why we should be looking at these stocks in our list of ideas. But they don’t always outperform. For example, last year, 2023, they underperformed by quite a bit compared to the Dow Industrials Index.

There are many other examples. If [00:13:30] you go to that website, dogsofthedow.com, you can see the years that it’s underperformed. But 2017, 2019, and there was even kind of a prolonged period between ’07 and ’09 where they did not outperform. It doesn’t mean they went down, but they did outperform. So the dogs, in my view, are not necessarily something that we should do every year and do the Dogs or the Dow 10 especially because if we enter into a period of sideways markets, I [00:14:00] sometimes wonder if strategies like this will work because I think you have to be much more nimble in your buying and selling strategy. But whatever the case, they can provide a very good list of value ideas for us to be looking at because these are stocks that have high dividends and often that’s because they’ve been depressed a bit.

You saw that on a couple of them in the list we just looked at. So, if we use technical analysis, we can refine [00:14:30] our picks a bit, and we can become more of an active manager surrounding the Dogs of the Dow Strategy. So, in other words, rather than just buying the 10 or buying the 5 and then holding them for the entire year with no regard to the market, we can actually technically trade them and at least increase our safety of the markets not rewarding this strategy in the same way [00:15:00] it has in many other years. Alright, so I hope that helps. And, for future reference, you can look at that website, dogsofthedow.com, and any questions on your portfolio, you can come to Valuetrend.ca and hit the contact button and we’ll be happy to talk to you about how we might help you manage your portfolio as effectively [00:15:30] as we do for our clients.

We’ve had two-year numbers that are pretty good. We’ve made money in the past two years since the markets peaked back in early ’22 and markets have basically been dead flat or down since that period. The S&P, as you probably know, hit a peak of around 4,800, early ’22, and the TSX hit 22,000, if I’m not mistaken. Neither [00:16:00] of those levels. have been cracked, whereas the ValueTrend equity platform and the aggressive platform both have higher levels today. Thanks for watching and we’ll see you next time.

 

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