Unleashing the Power of Small Dogs Of the Dow

Small But Mighty: Investing in Small Dow Dogs

Updated March 19, 2024

In the stock market, where each move is as critical as a grandmaster’s gambit, the astute investor operates with a blend of historical precedent and innovative strategy. Embracing the collective understanding of centuries, distilled from the financial lore of legends like Buffett, Graham, and Munger, one finds a compelling strategy for the rookie investor: the “Small Dogs of the Dow.” This method marries the simplicity required by the newcomer with the sagacity of a seasoned contrarian.

The “Small Dogs of the Dow,” a refined variant of the venerable “Dogs of the Dow” methodology, offers a focused foray into the market, pinpointing the five most modestly priced among the ten top-yielding stocks of the Dow Jones Industrial Average. These underdogs, often overlooked, hold the potential for robust dividends and embody the resilience of well-established corporations.

For the beginner, this strategy is a beacon of clarity amidst the labyrinthine complexity of market data. It offers a straightforward compass, directing investments toward a portfolio balanced in both risk and reward. Yet, this simplicity belies a potent force; these “small dogs” are stalwarts, bearing the standard of financial fortitude and consistent dividends.

Historically, the “Small Dogs” track record speaks volumes, with returns often outpacing the broader indices. While history is not a crystal ball, it does provide a compelling narrative of success. As we unveil the 2024 candidates for this esteemed group, we also reveal a prudent, low-risk approach that may yield 20% or more annually.

The essence of mass psychology and contrarian investing is to recognize opportunity where others see none. In the “Small Dogs,” there lies a paradox: their diminutive market price veils a tenacious spirit capable of leading the pack. Thus, we find a profound truth — actual market gains are not always heralded by size but rather by the undervalued potential waiting to be unleashed.

In conclusion, the “Small Dogs of the Dow” strategy is a testament to strategic simplicity and the potential that awaits investors looking beyond the horizon. It is a call to the prudent, a siren song for the insightful, and a clear path for the beginner to tread confidently.

How does this strategy work?

The “Small Dogs of the Dow” strategy is a concentrated investment approach that selects the five lowest-priced stocks among the ten with the highest dividend yields from the Dow Jones Industrial Average. This method is grounded in the philosophy that these stocks are undervalued and poised for a rebound, offering both a potential for capital appreciation and a steady dividend income.

John Templeton, known for his global investment approach and value investing, might have seen the “Small Dogs” as a practical application of his principle: “To buy when others are despondently selling and to sell when others are avidly buying requires the greatest fortitude and pays the greatest ultimate rewards.” The “Small Dogs” strategy embodies this contrarian view, targeting stocks that are out of favour (hence their low price) yet still fundamentally solid—ripe for a turnaround.

Peter Lynch, with his knack for straightforward investing strategies, would likely appreciate the “Small Dogs” for its simplicity and focus on well-known companies. He famously advised investors to “Know what you own, and know why you own it,” and the “Small Dogs” strategy fits this bill by involving recognizable blue-chip stocks with a clear rationale for selection—high dividend yields and low prices indicating potential undervaluation.

Historically, the “Small Dogs” have demonstrated impressive performance, with a significant cumulative total return since 1972, outpacing both the broader Dow and S&P 500 indices. This suggests that despite their simplicity, these selections can be powerful components of an investment portfolio, offering a blend of income and growth.

Investors drawn to this strategy should consider the wisdom of these investing greats: look for value where others may not, understand what you’re investing in, and maintain a long-term perspective. The “Small Dogs” strategy, focusing on undervalued, high-yield stocks, offers a straightforward path to outperform the market while potentially providing a steady income stream.

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. This streamlined process is designed to facilitate your decision-making.

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 put to you at $26.65, you effectively pay $20.65 per share, a 22% discount from the current market price. The chances of the stock being put to you immediately are low because of the time premium in the options.

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 a way 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.

Advantages of the Small Dogs of the Dow Strategy

The “Small Dogs of the Dow” strategy indeed focuses on the five lowest-priced stocks among the ten with the highest dividend yield from the Dow Jones Industrial Average. This method is a variation of the broader “Dogs of the Dow” strategy, aiming to leverage both dividend income and potential capital appreciation. The rationale is that these lower-priced stocks may have more room for price growth, alongside offering attractive dividends.

The “Small Dogs of the Dow” strategy, renowned for its simplicity, mirrors the investment wisdom of Sir John Templeton, who once said, “If you want to have a better performance than the crowd, you must do things differently from the crowd.” Here, the crowd follows complex trends, while this strategy simplifies the process, targeting the ten highest dividend-yielding stocks within the Dow Jones Industrial Average (DJIA). It’s a straightforward approach that resonates with Templeton’s philosophy of seeking out value where others may not.

Peter Lynch, famed for his “invest in what you know” mantra, would appreciate this strategy’s focus on established companies with historically solid dividends. These high-yield dividends offer investors a consistent income stream, echoing Lynch’s preference for companies with solid cash flows. Moreover, the strategy’s historical performance adds another layer of appeal. Studies indicating an average outperformance of 2% per year over the DJIA in the past two decades embody Lynch’s conviction that “Behind every stock is a company. Find out what it’s doing.”

Templeton’s contrarian approach is also at play here, as the “Small Dogs” often include stocks currently out of favour yet offer promising yields—a potential signal of undervaluation. Meanwhile, Lynch’s emphasis on understanding what you own is well-served since the strategy involves familiar blue-chip companies.

Risk management remains paramount, aligning with Templeton’s view that “The only investors who shouldn’t diversify are those who are right 100% of the time.” Interest rate fluctuations and company-specific financial health are risks to be considered, underscoring the need for the vigilant assessment of each stock.

Finally, this investment’s low cost aligns with Lynch’s practical approach, offering affordability through straightforward equal allocations or via ETFs and mutual funds that track the “Small Dogs” index.

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 of the companies could cut or eliminate its dividend, leading to a decline in the price of its shares.
Liquidity risk: Some of the Small Dogs of the Dow stocks 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 in the form of 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 that are 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 that offer both 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 portfolio to adjust to market shifts. While historical data shows that “Small Dogs” have outperformed the broader market at times, this is not a guarantee of future performance. Interest rate changes and individual company performance are key risk factors.

In essence, the “Small Dogs of the Dow” offers a focused investment approach that can lead to income and possible capital gains, provided that investors maintain diligence and adapt to economic conditions.