Unleashing the Power of Small Dogs Of the Dow

Small But Mighty: Unveiling the Power of Small Dow Dogs

Updated Nov 10, 2024

The savvy investor combines historical wisdom with modern innovation, drawing inspiration from legends like Buffett, Graham, and Munger. Among the many proven strategies, the “Small Dogs of the Dow” is an excellent starting point for new investors. In this discussion, we’ll explore this strategy in depth and unveil a simple yet powerful approach to potentially double or even triple its returns—all without increasing risk. These techniques are core elements of our offerings, including The Market Update and ETF Trend Trader services.

The “Small Dogs of the Dow” strategy is a refined take on the “Dogs of the Dow” approach. It pinpoints 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.

This strategy clarifies a complex market for beginners, 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.

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.

Beyond the Small Dogs: Top 10 Dow Candidates

This section outlines the Small Dogs of the Dow and five additional candidates. Some former candidates, like Dow (DOW), have dropped from the top spots, but many others still offer high yields that rival those of the traditional Small Dogs.

While not all the plays listed below strictly belong to the Small Dogs group, they offer dividend yields that resemble those typically associated with Small Dogs. **The “Small Dogs of the Dow” are the lowest-priced stocks among the ten highest dividend-yielding stocks in the Dow Jones Industrial Average** (DJIA). This strategy targets undervalued blue-chip companies with strong dividends, giving investors potential price recovery and reliable income.

Symbol	Company	Dividend Yield	Comments
WBA	Walgreens Boots Alliance	10.8%	Walgreens remains a top pick due to its strong yield and patterns that indicate potential value recovery.
VZ	Verizon Communications	7.11%	Verizon’s steady yield offers defensive stability in turbulent market conditions.
MMM	3M	5.68%	3M’s legal challenges have depressed its price, making its yield attractive for value-focused investors.
DOW	Dow	5.09%	Dow’s cyclical nature offers opportunities during economic recoveries, supported by technical analysis signals.
IBM	International Business Machines	4.13%	IBM’s transition to cloud computing continues to be a significant factor in its solid dividend policy.
CVX	Chevron	4.01%	Chevron’s exposure to oil prices makes it a strong choice for energy sector dividends.
AMGN	Amgen	3.22%	Amgen’s biotech leadership ensures consistent dividends through innovation and healthcare demand.
KO	Coca-Cola	3.17%	Coca-Cola’s brand strength and global reach contribute to its reliable dividend growth.
CSCO	Cisco Systems	3.14%	Cisco’s dividend remains stable due to its market leadership in networking infrastructure.
JNJ	Johnson & Johnson	3.07%	Despite challenges in pharmaceuticals, J&J’s broad healthcare base ensures dividend sustainability.

How Technical Analysis and Mass Psychology Can Enhance Returns with Small Dogs of the Dow

Technical analysis (TA) and mass psychology can provide strategic advantages when investing in the “Small Dogs of the Dow.” TA focuses on price movements and trends, while mass psychology examines market sentiment. These tools help investors time their entries and exits for better performance.

Example 1: Walgreens Boots Alliance (WBA)
Walgreens’ yield of almost 10% (based on Yahoo) makes it attractive, but its depressed stock price indicates market pessimism. TA patterns like double bottoms or oversold RSI indicators can signal potential reversals. When market sentiment is excessively negative, contrarian investors can capitalize on a rebound. Experts like John Murphy emphasize using momentum indicators to anticipate these price recoveries, aligning them with dividend opportunities.

Example 2: Chevron (CVX)
Oil stocks like Chevron benefit from sentiment-driven price fluctuations based on global oil prices. Moving averages and Fibonacci retracements have historically helped forecast Chevron’s recovery after dips. As investors flock to defensive sectors during uncertainty, mass psychology can lead to rallies once a support level is reached. Martin Pring highlights the importance of understanding sentiment in cyclical industries, advising investors to combine TA with market psychology to optimize timing.

Proposed Strategy: Tailored Solutions for 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

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.

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. 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.