This Easy-to-Use Stock Strategy Is Crushing the Market

When it comes to investing in stocks, it’s been a tough year in 2022. The Dow Jones Industrial Average (^DJI 0.00%) is down 6% for the year, and other major market indexes have seen even bigger losses.

Yet there’s a deceptively simple investing approach that has outperformed the Dow and its fellow stock market benchmarks. The Dogs of the Dow strategy is a mechanical approach that just about anyone can follow easily, and as it turns out, it’s doing a great job of beating the overall market so far this year. Let’s look more closely at the Dogs of the Dow and why they’re doing so well in 2022.

How the 2022 Dogs of the Dow have fared so far

Investment

Price Change in 2022 Year to Date

Dow Jones Industrials

(6%)

Dogs of the Dow

(0.2%)

Data source: Yahoo! Finance. As of Aug. 16.

What’s behind the Dogs of the Dow strategy?

A lot of investors like to keep things simple, and it’s easy to use the Dogs of the Dow method to pick stocks. In particular, the portfolio samples 10 stocks from the 30 companies that make up the Dow Jones Industrials, and it emphasizes high dividend yields and the potential for beaten-down stocks to bounce back.

To use the Dogs of the Dow strategy, you look at the 10 stocks among the Dow 30 that had the highest dividend yields as of the end of the previous year. Those who follow the strategy consistently buy all those stocks at the beginning of January, and then they hold on to them for the full year. It’s easy to extend the strategy beyond a single year, as all you have to do is get updated dividend yields at the end of the year and then replace any stocks that no longer make the top-yield list with the new entrants.

Typically, the Dogs of the Dow strategy is strongest when investors are interested in value stocks. The Dow stocks that tend to have the highest yields are those that have suffered temporary share-price hits, and buying their shares as Dogs of the Dow is a bet that those businesses will rebound and help the stock bounce back. That’s not something investors can count on from just any high-yield stock, but the higher-quality businesses that get invited to be members of the Dow Jones Industrials generally have blue chip strength that allows them to survive down economic cycles in ways that weaker companies might not.

Why are the Dogs beating the market in 2022?

In 2022, the strong performance of the Dogs of the Dow stems from several factors. First, energy stocks have remained strong, and Chevron (CVX 1.75%) is the best performer in both the overall Dow and among the Dogs stocks.

In addition, double-digit percentage gains for healthcare companies Merck (A 0.40%) and Amgen (AMGN -0.35%) have definitely helped the Dogs as well. These stocks have seen renewed interest after having been left on the event during the strong period for growth stocks in past years.

Finally, the Dogs have most of the worst performers in the Dow, including former high-growth favorites like Nike (NKE -0.88%) and Salesforce.com (CRM -0.02%) with their drops of 25% to 30%.

It’s important to note, though, that there are still more than four months left in the year, and anything can happen. The Dogs had a similar lead early in 2021, but that completely went away by the end of the year as the overall Dow outperformed by nearly 8 percentage points.

Regardless, many investors find the Dogs of the Dow useful as a way to generate income and keep their portfolios simple. Even though the strategy won’t outperform the Dow all the time, investing in the Dogs of the Dow can give your portfolio a value tilt that appeals to many conservative investors in the stock market.

Dan Caplinger has positions in Nike. The Motley Fool has positions in and recommends Merck & Co., Nike, and Salesforce, Inc. The Motley Fool recommends Amgen. The Motley Fool has a disclosure policy.

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