Current Small Dogs of the Dow: Small Bark, Big Bite

Current Small Dogs of the Dow: Unveiling the Powerhouses

June 12, 2024

Introduction: A Strategic Approach to Market Dominance

In the dynamic arena of stock market investing, where every move is akin to a grandmaster’s strategic gambit, the astute investor must blend historical insight with innovative thinking. Drawing from the collective wisdom of legends like Warren Buffett, Benjamin Graham, and Charlie Munger, a striking strategy emerges from the “Small Dogs of the Dow.” This refined approach is a beacon for rookie investors, offering a focused path to market success.

The “Small Dogs of the Dow” strategy is more than just a clever twist on the venerable “Dogs of the Dow” methodology. It is a calculated strike, pinpointing the five most modestly priced, high-yielding stocks within the mighty Dow Jones Industrial Average. Often overlooked by the masses, these unsung heroes possess a hidden strength that can deliver a mighty blow to the competition.

As we embark on this financial journey, we uncover the potential for robust dividends and the resilience of established corporations. The “Small Dogs” strategy provides a balanced approach to risk and reward, offering both stability and the prospect of substantial gains. It is within this delicate equilibrium that investors find their edge.

The Essence of the Strategy

The “Small Dogs of the Dow” strategy is underpinned by a fundamental principle: targeting undervalued stocks with high dividend yields. By selecting the five lowest-priced stocks among the top ten dividend payers in the DJIA, investors seek to harness the dual benefits of capital appreciation and consistent income. This approach aligns with the investment philosophies of renowned figures, setting the stage for a captivating financial tale.

The “Small Dogs” strategy has garnered the attention of investing greats, each bringing their unique perspective. The legendary global investor John Templeton would likely approve this contrarian approach. Known for buying when others were sad, Templeton’s philosophy resonates with the “Small Dogs” strategy. He famously stated, “To buy when others are despondently selling requires fortitude and pays the ultimate rewards.” The “Small Dogs” embody this very spirit, seeking out-of-favour stocks with the potential for a robust turnaround.

Peter Lynch, a master of straightforward strategies, would appreciate the simplicity and focus of the “Small Dogs.” He advised investors to “Know what you own,” and this strategy delivers precisely that. By investing in recognizable blue-chip companies with solid dividend histories, the “Small Dogs” clearly understand what you’re getting into.

The “Small Dogs” ‘ historical performance further bolsters their appeal. With significant cumulative returns since its inception, this strategy has consistently outpaced the broader Dow and S&P 500 indices. While past performance does not guarantee future results, it certainly adds weight to the narrative of success that the “Small Dogs” present.

Enhancing Returns: The Power of Mass Psychology and Technical Analysis

Investors can harness the power of mass psychology and technical analysis to fully unlock the potential of the “Small Dogs” strategy. Mass psychology, the study of market sentiment and crowd behaviour, provides valuable insights into the emotional cycles that drive buying and selling decisions. Investors can precisely time their entries and exits by understanding the fear and greed that move markets.

Technical analysis, on the other hand, involves studying price charts and indicators to identify trends and patterns. Combining this with mass psychology allows investors to fine-tune their trades, buying when stocks are oversold and selling when they become overbought. This dynamic duo of analytical tools can enhance returns and improve risk management.

Unveiling the 2024 “Small Dogs” Lineup

As we enter 2024, the “Small Dogs of the Dow” portfolio presents an intriguing mix of high-yielding stocks. Walgreens (WBA) and Verizon (VZ) are leading the pack, offering juicy dividend yields of 7.35% and 7.6%, respectively. Walgreens, in particular, stands out for its favourable technical analysis patterns, making it a top choice for investors seeking a blend of income and growth potential.

The roster also includes stalwarts like Dow (DOW) with a yield of 5.11%, Cisco (CSCO) at 3.09%, and the iconic Coca-Cola (KO) with a yield of 3.12%. While these stocks may not have the highest yields, they offer a balance of income potential and the stability that comes with an established market presence.

Implementing the Strategy: A Tactical Guide

Investors eager to deploy the “Small Dogs” strategy have various options. One straightforward approach is to invest equal amounts in each of the five selected stocks, creating a well-diversified portfolio. Alternatively, exchange-traded funds (ETFs) or mutual funds that track the “Small Dogs” index provide an easy way to gain exposure to this strategy with a single investment.

For those seeking a more active role, selling puts and covered calls can boost returns. This involves selling slightly in-the-money puts to acquire shares at a discount and then selling covered calls on those shares to generate premium income. Investors can enhance their profits by actively managing these options based on market conditions.

Unleashing the Power of Dividend Reinvestment

One of the most powerful tools in an investor’s arsenal is dividend reinvestment. By automatically reinvesting the dividends earned from the “Small Dogs” stocks, investors can supercharge their returns over the long term. The Dividend Reinvestment Plans (DRIPs) strategy allows investors to compound their gains by purchasing additional shares with the dividends received.

The magic of dividend reinvestment lies in its ability to accelerate the growth of an investor’s portfolio. Over time, the reinvested dividends buy more shares, generating more dividends and creating a virtuous cycle of compounding returns. Albert Einstein once famously stated, “Compound interest is the world’s eighth wonder. He who understands it earns it; he who doesn’t pays it.” By harnessing the power of dividend reinvestment, investors can tap into this “eighth wonder” and watch their wealth grow exponentially.

Numerous studies have shown the significant impact of dividend reinvestment on long-term returns. According to a report by Hartford Funds, from 1960 to 2021, reinvested dividends accounted for 84% of the S&P 500’s total return. This means a staggering $10,000 invested in the S&P 500 in 1960 would have grown to over $3.8 million by 2021 with dividend reinvestment, compared to just $627,161 without reinvestment.

Investors can quickly implement dividend reinvestment with the “Small Dogs” strategy by enrolling in DRIPs that companies or brokers offer. Many brokers provide the option to automatically reinvest dividends at no additional cost, making it a seamless process for investors.

By combining the power of dividend reinvestment with the “Small Dogs of the Dow” strategy, investors can potentially supercharge their returns and build substantial wealth over the long term. As legendary investor Warren Buffett once said, “The goal of the non-professional should not be to pick winners but rather to own a cross-section of businesses that, in the aggregate, are bound to do well. A low-cost S&P 500 index fund will achieve this goal.” The “Small Dogs” strategy, coupled with dividend reinvestment, offers a compelling way to own a concentrated yet diverse set of high-quality businesses with the potential for attractive total returns.

Navigating the Risks: A Vigilant Approach

While the “Small Dogs” strategy offers enticing prospects, it is not without its risks. Concentration risk, market fluctuations, and dividend stability are factors to consider. To mitigate these risks, investors should diversify their overall portfolio, regularly assess the financial health of the selected companies, and employ stop-loss orders to limit potential losses.

Additionally, it’s crucial to remember that past performance does not guarantee future results. While historically successful, the “Small Dogs” strategy may not consistently outperform the broader market. A long-term perspective and thorough due diligence are essential for managing expectations and making informed decisions.

Conclusion: Unleashing the Power of the Underdogs

The “Small Dogs of the Dow” strategy presents a compelling opportunity for investors seeking to harness the potential of undervalued, high-yielding stocks within the DJIA. By combining dividend income with the prospect of capital appreciation, this strategy aligns with the investment philosophies of giants like John Templeton and Peter Lynch.

Mass psychology and technical analysis further enhance the “Small Dogs” approach, providing investors with a powerful toolkit to optimize their trades. With the 2024 lineup offering attractive yields and the potential for substantial gains, the “Small Dogs” are poised to make their mark.

As with any investment strategy, a measured approach, diligent research, and a long-term perspective are critical. By embracing the “Small Dogs” strategy, investors can unleash the hidden power of these underdogs and potentially reap significant rewards in the dynamic world of stock market investing.