Should You Buy the Dogs of the Dow?

The strongest Dow stocks of 2017 could lead again in 2018, if history repeats

Managing Editor
Dec 28, 2017 at 1:53 PM
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The "Dogs of the Dow" investing theory generally posits that the highest dividend-yielding stocks on the Dow Jones Industrial Average (DJIA) at the end of the year often net the biggest reward over the next year. However, Schaeffer's Senior Quantitative Analyst Rocky White crunched the numbers on the "dogs" of recent years, and examined what blue-chip stocks' 2017 performance could mean for 2018.

Dogs of the Dow By Dividend Yield

First, we looked at the dividend yield of the stocks. For each year, we found the average return of the five Dow stocks with the highest yield at the beginning of the year, the five with the lowest yield, and then stocks with moderate yields.

According to the "Dogs of the Dow" theory, the highest yielding stocks should have the best returns over the next year, as their prices are depressed the most relative to their dividend payment. The last three years, these stocks outperformed the other brackets. The prior three years, however, the lowest yielding stocks did best.

Dow Highest Yields Chart

Dogs of the Dow By Stock Performance

Below is a similar chart, but instead of using dividend yields, it looks at the best/worst five stocks the prior year. Here, the "Dogs of the Dow" theory would probably hypothesize that the worst five stocks the prior year should outperform the other stocks in the subsequent year. However, that has not been the case in recent years. Since 2011, the best five stocks the prior year outperformed other stocks in five of the seven years. 

Dow Best 5 Stocks Chart

Now, here’s a list of current Dow stocks with some relative data.

Dow Stocks Divident Yield

Dow Stocks Poised For A Big 2018?

If past is precedent, based on the last set of data, the top five stocks of 2017 -- Boeing Co (NYSE:BA), Caterpillar (NYSE:CAT), Apple Inc (NASDAQ: AAPL), Visa Inc (NYSE:V), and Walmart Stores Inc (NYSE:WMT) -- could outperform in 2018. Boeing stock has been the best blue-chip performer so far in 2017, and tends to rally out of the gate to start a new year. Visa stock just touched a record high on tax reform optimism, and even FAANG stock Apple, for all of its struggles lately, could bounce back in a big way, if history repeats. 

Caterpillar stock has been the second-best blue chip of 2017, and touched a record high of $158.41 today. The shares' steady rise has been guided higher by their rising 20-day moving average, which has provided support since June. However, analysts aren't as optimistic. Of the 20 brokerages covering CAT, only eight rate the stock a "buy" or "strong buy." This leaves plenty of room for upgrades to lure more buyers to the table.

Walmart stock sits at $99.34 today, a chip-shot from the record high of $100.13 it set on Nov. 17. Despite the stock's long-term uptrend, analysts remain skeptical. Only 45% of brokerages covering WMT rate the shares a "buy" or better. A round of bullish brokerage notes could also translate into tailwinds for the retail giant.


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