Unleashing the Power of Small Dogs Of the Dow

Small But Mighty: Unveiling the Power of Small Dow Dogs

Updated June 30, 2024

In the intricate world of stock market investing, every move is critical. The astute investor blends historical insight with innovative strategies, drawing from the collective wisdom of legends like Buffett, Graham, and Munger. Among these strategies, the “Small Dogs of the Dow” is a compelling option for rookie investors.

The “Small Dogs of the Dow” strategy is a refined take on the “Dogs of the Dow” approach, pinpointing the five most modestly priced, high-yielding stocks within the Dow Jones Industrial Average. These underdogs offer robust dividend potential and the resilience of established corporations.

For beginners, this strategy provides clarity in a complex market, offering a balanced approach to risk and reward. Its simplicity belies its potency, as these “small dogs” are stalwarts known for financial fortitude and consistent dividends.

Historically, the “Small Dogs” have delivered impressive returns, often outpacing broader indices. While past performance does not guarantee future success, it does provide a compelling narrative. As we reveal the 2024 candidates, we also uncover a low-risk approach with the potential for substantial annual gains.”

The “Small Dogs of the Dow” Strategy: Unlocking Value

The “Small Dogs of the Dow” strategy is a concentrated investment approach. It selects the five lowest-priced stocks with the highest dividend yields from the Dow Jones Industrial Average. This strategy targets undervalued stocks poised for growth, offering capital appreciation and steady dividend income.

John Templeton, renowned for his global value investing approach, would likely endorse this strategy. He advocated buying when others were sad, stating, “To buy when others are despondently selling… requires fortitude and pays the greatest ultimate rewards.” The “Small Dogs” embody this contrarian view, seeking out-of-favor stocks with turnaround potential.

Peter Lynch, known for his straightforward strategies, would appreciate the “Small Dogs”‘ simplicity. He advised investors to “Know what you own.” The “Small Dogs” strategy does precisely that, focusing on recognizable blue-chip stocks with high dividend yields and potential undervaluation.

This strategy has a strong historical performance, with significant cumulative returns since 1972, outpacing the Dow and S&P 500 indices. Investors drawn to this approach should heed the wisdom of these greats: seek value, understand your investments, and maintain a long-term perspective.”

Good News!! We’ve completed the necessary groundwork for you. Your task now is to review the list of five and determine which one best aligns with your preferences and investment goals.

Small Dogs of the Dow Portfolio for 2024

Embark on a unique investment journey with our “Small Dogs of the Dow” portfolio, a captivating twist on the renowned ‘Dogs of the Dow’ strategy. This distinctive approach zeroes in on the five lowest-priced among the ten highest dividend-yielding stocks in the Dow Jones Industrial Average. The carefully curated “Small Dogs” list for 2024 spans diverse industries, as shown below.

Symbol	Company	Current Yield	Comments
WBA	Walgreens	7.35	A leading choice was selected for its yield and technical analysis pattern.
VZ	Verizon	7.6
DOW	Dow	5.11
CSCO	CISCO	3.09
KO	Coco Cola	3.12

Among the notable candidates on our list, VZ and WBA stand out with impressive yields. However, let’s see what happens when we delve into technical patterns and compelling buy opportunities; does the order undergo a shift? We will discuss this shortly. Nevertheless, adhering to two fundamental principles is crucial in navigating any investment strategy.

Firstly, invest only the funds you can comfortably set aside for a minimum of 12 months. This ensures a thoughtful and patient approach to your investments. Secondly, adopt a strategic approach by deploying your funds incrementally. For instance, if you plan to invest $12,000 in WBA, consider breaking it down into four lots of $3,000 each, deploying one lot at a time. This approach helps manage risk and allows you to capitalize on potential opportunities in a controlled manner.

Top Picks from the Small Dogs of the Dow Roster

It’s intriguing to observe that, from a technical analysis standpoint, both VZ and WBA emerge as the top choices. However, within this analysis, WBA presents a distinctive risk profile concerning technical patterns. Despite a slightly lower dividend compared to VZ, the robustness of its patterns enhances its overall appeal. It’s essential to acknowledge that these two selections carry higher risk among the five. As the adage goes, no pain, no gain.

Proposed Strategy: Catering to both Conservative and Ultra-Conservative Investors

Our suggested strategy accommodates conservative and ultra-conservative investors, presenting two distinct options. This approach allows low-risk investors the flexibility to tailor their investment choices by combining these alternatives.

Ultra-Low-Risk Strategy:

Selling slightly in-the-money puts with ample time premium is a method of generating income. Take WBA as an example: On Jan 3, 2024, on Jan 26, $27.00 puts were sold for around $6.00 each. By selling one put, you receive $600.

Here’s the key: even if the stock is offered at $26.65, you effectively pay $20.65 per share, a 22% discount from the current market price. Because of the time premium in the options, the chances of the stock being offered immediately are low.

The put value drops as the stock goes up, allowing you to repurchase it for less than you sold. To enhance returns, you can wait until the stock is overbought according to weekly charts and technical indicators like RSI or Stochastics. Websites like finviz.com or tradingview.com can help with these charts. When it’s overbought, buy back the put; when it’s oversold, sell it again.

Daily charts are an option for those preferring more frequent trading, though it comes with increased risk. When the stock hits the overbought range, buy back the puts; then, as it moves into the oversold range, sell the put again. This patient approach can yield a conservative 20% or more annually with this secure strategy. However, a crucial rule is to sell puts only on stocks you genuinely want to own, avoiding speculation.

Maximizing Returns with a Dual Approach: Selling Puts and Covered Calls

Now, let’s explore how to boost returns if the shares are in your account. Once you possess at least 100 shares, you can flip the strategy and sell in-the-money calls.

For instance, consider the Jan 26, $27.50 call trading at approximately $5.00 with WBA. Selling a covered call would deposit $500 into your account. If the shares were called away, you would secure a gain of 19% based on the closing price of $26.65 as of Jan 3, 2024.

Combining selling puts and covered calls creates a dynamic strategy that generates income and capitalizes on potential stock appreciation. It’s a thoughtful approach to enhancing your overall market returns.

Balanced Risk Strategy for Conservative Investors

Let’s discuss a balanced risk strategy tailored for conservative investors. Divide your money into four portions and utilize monthly and weekly charts to time your entry points. When a stock is in the oversold zone on both charts, deploy one portion of your funds. If the stock continues to drop, deploy additional portions.

It’s important to note that just because a stock is oversold doesn’t guarantee an immediate turnaround. It might move from oversold to extremely oversold before finding a bottom. The key is not to precisely time the bottom but to buy when the risk-to-reward ratio is favourable.

Moreover, you can combine this strategy with the earlier one, which involves selling puts and covered calls, to enhance your returns further. This dual approach allows you to benefit from potential stock appreciation while maintaining a balanced and conservative risk profile.

Risks of the Strategy

Like any investment strategy, the Small Dogs of the Dow strategy carries risks that investors should consider before investing. Here are some of the critical risks associated with this strategy:

Market risk: Investing in the stock market carries inherent market risk. For example, the value of your investments can fluctuate due to economic, political, and other factors beyond your control.
Concentration risk: The Small Dogs of the Dow strategy focuses on a limited number of stocks, which can lead to concentration risk. If one or more of the stocks in your portfolio experiences a significant decline in value, your overall portfolio could suffer.
Sector risk: The Small Dogs of the Dow strategy does not consider the sector or industry of the companies in the Dow Jones Industrial Average. This means that your portfolio could be heavily concentrated in a particular industry, which can increase your risk if that sector experiences a downturn.
Dividend risk: While investing in high-yielding stocks can provide income, it also carries dividend risk. One company could cut or eliminate its dividend, leading to a decline in the price of its shares.
Liquidity risk: Some of the Dow’s Small Dogs may have lower trading volumes, making it more difficult to buy or sell shares, particularly during market volatility.

Historical Performance

The Small Dogs of the Dow strategy has historically outperformed the broader market. According to some studies, the Small Dogs of the Dow have outperformed the Dow Jones Industrial Average by an average of 2% per year over the past two decades.

For example, in 2019, the Small Dogs of the Dow index returned 22.7%, while the Dow Jones Industrial Average returned 22.3%. In 2020, the Small Dogs of the Dow index returned -5.3%, while the Dow Jones Industrial Average returned -9.7%.

In 2021, the Small Dogs of the Dow underperformed the S&P 500 by 16 percentage points. As for 2022, the Dogs of the Dow were down less than the market.

It’s important to note that while the Small Dogs of the Dow strategy has shown promising results in the past, it does not guarantee future performance. Investors should consider their risk tolerance and investment goals before adopting this strategy.

How to implement the Small Dogs of the Dow strategy

To implement the Small Dogs of the Dow strategy, you can invest equal amounts of money into each of the Small Dogs of the Dow stocks. You can also use an ETF or mutual fund that tracks the Small Dogs of the Dow index.

Several ETFs and mutual funds track the Small Dogs of the Dow index, providing investors with a convenient way to invest in the Small Dogs of the Dow without buying each stock individually. Some of the most popular Small Dogs of the Dow ETFs and mutual funds include:

Invesco Dow Jones Industrial Average Dividend ETF (DJD)
ALPS Sector Dividend Dogs ETF (SDOG)
First Trust Dow Jones Select MicroCap Index Fund (FDM)
ProShares Russell 2000 Dividend Growers ETF (SMDV)
Guggenheim Dow Jones Industrial Average Dividend ETF (DJD)

Alternatives to the Small Dogs of the Dow Strategy

There are many alternative investment strategies for investors, depending on their investment goals, risk tolerance, and other factors. Some popular alternatives to the Small Dogs of the Dow strategy include:

Index funds are a type of investment fund, either a mutual fund or exchange-traded fund (ETF), that follows or tracks specific market indices, such as the S&P 500 or Nasdaq Composite. By doing so, index funds offer investors exposure to a diverse portfolio of securities, which can help manage investment risk.
Growth stocks are firms predicted to grow faster than the market as a whole. These stocks may not pay high dividends, but they have the potential for capital appreciation.
Value stocks: Value stocks are companies considered undervalued by the market. These stocks may pay dividends but also have the potential for capital appreciation as the market recognizes their value.
Dividend growth stocks are firms with a history of raising payouts over time. These stocks may not have the highest dividend yields, but they have the potential for income and capital appreciation.
Area-specific funds are mutual or exchange-traded funds that invest in a particular area of the economy, such as technology or healthcare. These funds provide investors with exposure to one specific area of the market. They can be used to diversify a portfolio.

Conclusion

The “Small Dogs of the Dow” strategy targets the five lowest-priced stocks among the top ten dividend-yielders in the Dow Jones Industrial Average. Its simplicity appeals to novice investors, focusing on potential undervalued companies offering dividend income and growth prospects.

For factual implementation, consider the 2023 example where Merck & Co., Inc. was one of the “Small Dogs.” As a low-priced stock with a high dividend yield at the time, it attracted investors looking for value and income. Yet, like any investment strategy, it carries risks, such as market volatility and company-specific financial setbacks.

Investors employing this strategy must research and assess risk, diversify their holdings, and regularly review their portfolios to adjust to market shifts. While historical data shows that “Small Dogs” have sometimes outperformed the broader market, this does not guarantee future performance. Interest rate changes and individual company performance are key risk factors.