Sunday, November 22, 2020

Dogs Of The Dow Are Dogs This Year

With less than thirty trading days left in the year, the Dogs of the Dow have a great deal of ground to make up just to be competitive with the return for the Dow Jones Industrial Average Index and the S&P 500 Index. Not one of the Dow Dogs has a positive return on a price only basis this year. The Dow Dogs are down 15.0% on a price only basis and down 11.2% on a total return basis. The Dow Jones Industrial Average Index also lags the S&P 500 Index but has generated a positive return to date. On a price only basis the SPDR Dow Jones Industrial Average ETF (DIA) is up 2.6% and up 4.7% with dividends. The SPDR S&P 500 Index ETF (SPY) is up 10.4%, price only and up 12.0% with dividends.

The Dogs of the Dow strategy is one where investors select the ten stocks that have the highest dividend yield from the stocks in the Dow Jones Industrial Index after the close of business on the last trading day of the year. Once the ten stocks are determined, an investor invests an equal dollar amount in each of the ten stocks and holds them for the entire next year. The popularity of the strategy is its singular focus on dividend yield.

Through November 20, 2020 the three areas contributing the most to the underperformance of the Dow Dogs versus the Dow Jones Industrial Index are the information technology, energy and consumer staples sectors. In a year where the FAANG+Microsoft (MSFT) basket of stocks are a big contributor to index returns, the Dow Dogs hold none of the FAANG+M companies. As I noted in an earlier post, the FAANG+M stocks have lagged the broader market since the end of August with the market favoring more value oriented equities. This has benefited the Dow Dogs relative return in he short run. The question is whether or not this rotation into value is sustainable or a minor blip. The Dogs are more value-like given the strategies focus on income, but the year to date return is pretty far behind the Dow Jones Industrial Average Index and the S&P 500 Index return. It may just be too much ground for the Dow Dogs to make up before year end.

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