Small Dogs of the Dow Strategy: Small Dogs Packing a Big Bite

Small Dogs of the Dow Strategy: Little Stocks, Big Gains

June 13, 2024

Introduction: Unleashing the Power of the Underdogs

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.

The Essence of the “Small Dogs” 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 nod in approval at 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.

Historical Performance: A Compelling Narrative

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.

For instance, in 2019, the Small Dogs of the Dow index returned an impressive 22.7%, outperforming the Dow Jones Industrial Average’s return of 22.3%. Even during the challenging market conditions of 2020, the Small Dogs demonstrated resilience, with a return of -5.3% compared to the Dow’s -9.7%.

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 exit 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.

For example, using the Relative Strength Index (RSI) or Stochastics in conjunction with the “Small Dogs” strategy can help identify optimal entry and exit points. When a stock is oversold on the weekly and monthly charts, it may present a compelling buying opportunity. Conversely, when a stock becomes overbought, it could be a signal to take profits or sell covered calls to generate additional income.

The 2024 “Small Dogs” Lineup: Unveiling the Powerhouses

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 example, the Invesco Dow Jones Industrial Average Dividend ETF (DJD) and the ALPS Sector Dividend Dogs ETF (SDOG) are popular choices for investors seeking a convenient way to implement the “Small Dogs” strategy.

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 positions based on market conditions.

Unleashing the Power of Dividend Reinvestment for Maximum Returns

Dividend reinvestment is an investor’s secret weapon, and when applied to the “Small Dogs” stocks, it becomes a potent strategy for boosting long-term gains. This approach, Dividend Reinvestment Plans (DRIPs), enables investors to compound their wealth by using dividends to purchase additional shares.

The beauty of dividend reinvestment lies in its ability to accelerate portfolio growth exponentially. As reinvested dividends buy more shares, a virtuous cycle begins: more shares lead to higher dividends, which, in turn, compound returns. Albert Einstein recognized the power of compounding, stating, “Compound interest is the eighth wonder of the world.” By leveraging dividend reinvestment, investors can unlock this “eighth wonder” and witness their wealth skyrocket.

The impact of dividend reinvestment is undeniable. According to Hartford Funds, from 1960 to 2021, reinvested dividends contributed a staggering 84% to the S&P 500’s total return. This means a $10,000 investment in the S&P 500 in 1960 would have grown to over $3.8 million by 2021 with dividend reinvestment—a substantial difference compared to just $627,161 without it.

Implementing dividend reinvestment with the “Small Dogs” strategy is straightforward. Investors can enrol in DRIPs offered by companies or their brokers, with many brokers providing a seamless, no-cost option to reinvest dividends automatically.

By combining dividend reinvestment with the “Small Dogs of the Dow” approach, investors can supercharge their returns and build significant wealth. As Warren Buffett wisely advised, “Own a cross-section of businesses that, in aggregate, are bound to do well.” The “Small Dogs” strategy, enhanced by dividend reinvestment, offers a unique opportunity to own a diverse set of high-quality businesses with attractive total return potential.

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 key. 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.

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