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'Dogs of the Dow' Find Blue Chip Stocks With Large Payouts. Here’s the List for 2024

December 10, 2023
minute read

In the coming year, a renowned investment strategy known as the "Dogs of the Dow" is poised to incorporate two prominent blue-chip stocks, catering to investors with a thirst for dividends.

Originating in the early 1990s and popularized by investor Michael O'Higgins, the strategy is straightforward: at the beginning of each year, acquire shares of the 10 highest-dividend yielding companies within the Dow Jones Industrial Average. The objective is to assess whether these selections can yield both price appreciation and cash payouts.

The rationale behind this strategy lies in its focus on the Dow, comprised of well-established companies, providing a high-quality tilt to the portfolio. Additionally, by emphasizing the dividend yield, which tends to rise when stock prices decline, adherents of the strategy may be acquiring stocks at lower valuations relative to their historical performance, potentially setting the stage for a rebound.

Given the prevailing market sentiment that anticipates a rate cut by the Federal Reserve in 2024, next year could prove favorable for stocks offering robust dividend yields, according to Kevin Simpson, founder and chief investment officer at Capital Wealth Planning.

Simpson clarified that while the strategy is not purely based on a straightforward calculation, considering the fundamentals of the company is essential. From a broader perspective, the strategy is expected to fare better in an environment where interest rates are decreasing, as opposed to an environment of increasing rates.

However, the strategy doesn't guarantee success every year. In 2022, the Dogs outperformed the broader market during a period of equity market decline. Yet, in 2023, they have lagged behind the S&P 500, which has been led higher by the so-called "Magnificent 7." As of the latest data, an equal-weighted portfolio of the Dogs of the Dow has yielded a modest 6.7% total return for the year, slightly worse than the full Dow and notably below the returns of the S&P 500 and Nasdaq Composite.

Amid this underperformance, it comes as no surprise that only two members are set to break into the top 10 dividend yields for the next year. As of the latest data, JPMorgan and Intel are likely to be replaced on the Dogs list by Coca-Cola and Goldman Sachs. However, it's worth noting that this list could still undergo changes by the year-end.

Investors have the flexibility to adhere to the spirit of the Dogs of the Dow theory without necessarily buying all 10 recommended stocks. Currently, Simpson holds six out of the ten names on the preliminary 2024 list, including Coca-Cola, IBM, and Verizon.

He particularly highlighted Verizon as a stock that appears to have stabilized after a turbulent period and is strengthening its fundamentals. Despite substantial capital expenditures for 5G technology, Simpson emphasized Verizon's strategic approach to managing its debt before interest rate hikes, locking in low-interest rate paper and making prudent financial decisions.

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