What is the Dogs of the Dow screen?
The Dogs of the Dow screen ranks the 30 members of the Dow Jones Industrial Average by dividend yield and keeps the 10 that yield the most. Michael O'Higgins set out the method in Beating the Dow (1991), written with John Downes, and the nickname stuck: the "dogs" are the blue chips the market has temporarily kicked to the curb. The rule is deliberately blunt. Once a year — most investors use the first trading day — you buy the ten highest-yielding Dow stocks in equal dollar amounts, hold for twelve months, then rebuild the list and rebalance.
The core idea
A stock's dividend yield is its annual dividend per share divided by its price. Because a large, established company adjusts its payout slowly, the yield moves mostly when the price moves. A yield near the top of the Dow usually means the share price has fallen while the dividend has held — the market has soured on the company's near-term prospects. O'Higgins's wager is that this pessimism is usually overdone. The thirty Dow names are among the most heavily analyzed companies anywhere, with the balance sheets and franchises to survive a bad year, so a depressed price tends to reflect mood rather than lasting damage. Buy the cheapest of them by yield, collect the dividend while you wait, and let the price drift back toward normal.
Why yield rather than the price-earnings ratio or book value? O'Higgins argued the dividend is the steadier yardstick. Reported earnings swing with the business cycle and bend under accounting choices; a declared cash dividend does neither. That makes yield a cleaner read on how cheap a Dow stock has become relative to its own history, and it keeps the whole process mechanical enough to run without forecasts or judgment calls.
What the Dogs of the Dow screen looks for
- The stock must be a current member of the Dow Jones Industrial Average — the universe is those 30 companies and nothing else.
- Rank all 30 by indicated dividend yield and keep the 10 highest.
- Hold the ten in equal dollar amounts, roughly 10% of the portfolio each.
The list is rebuilt on each one-year anniversary. You recompute the top ten by yield, sell the names that dropped off, buy the newcomers, and trim or top up the survivors back to equal weight. Between those dates you ignore the portfolio.
The evidence and why it can work
Jeremy Siegel tabulated the strategy decade by decade in Stocks for the Long Run and found the ten-stock Dogs portfolio beat both the Dow 30 and the S&P 500 in most stretches from the 1940s through the 1990s — roughly 13.3% a year in the 1970s against about 6.8% for the Dow, and about 21.8% in the 1980s against 18.6%. Those figures exclude taxes and trading costs. The appeal is as much behavioral as statistical: the rule forces you to buy what feels uncomfortable and sell what has already recovered, the opposite of what most investors do on instinct.
What to keep in mind
Much of that record predates the strategy's fame. Once the Dogs became a magazine staple and the basis for packaged unit trusts, enough money chased the same ten names to blunt the edge — a high yield only pays off if the stock is genuinely unloved, and popularity erodes exactly that. The annual reshuffle also runs 30% to 40% turnover, so transaction costs and, in a taxable account, capital gains taxes eat into the gross numbers Siegel reported. And yield is a single signal: it can flag a company whose dividend is about to be cut rather than one poised to recover, and the screen has no way to tell the two apart.
Sources
Beating the Dow, Michael O'Higgins with John Downes, HarperCollins, 1991.
American Association of Individual Investors (AAII) — Stock Investor Pro screen definition.