The Dogs of the Dow Are About to Rally
The look on his face let you know it wasn’t going well.
He was clearly frustrated, almost in tears running up and down the court, and it wasn’t even halftime.
I was at my 8-year-old son’s basketball playoff game, and they were down by 10 in the second quarter.
For this age group, scoring 20 points in a game is a lot. So, to be down by 10 seemed impossible to come back from.
But basketball is a game of runs — where teams can rally back into a game.
That’s exactly what his team did, and they made it a great game before it was all over.
The nature of going on runs sums up how the markets work.
Certain asset classes are going to be in favor for some time, where it seems like they can’t do anything wrong in analysts’ eyes.
Eventually, that favor will switch, and the stocks that no one liked will eventually be in favor.
We are at such a point in the market right now, and one segment of the market will outperform over the next year as it goes on its comeback rally.
Let me explain…
A Select Group of Stocks
So far this year, a select group of dividend stocks, known as the “Dogs of the Dow,” have underperformed the market.
The Dogs of the Dow are simply the 10 highest-yielding stocks in the Dow Jones Industrial Average (DJIA) at the end of each year.
So the stocks we are talking about were the highest-yielding stocks in the DJIA at the end of 2016.
And to find a year where this group of dividend stocks underperformed the DJIA this bad, you have to go back to 2009 — a much different time in the market.
The End of a Bear Market
If you think back to what was going on in the market in 2009, the underperformance makes sense.
The economy was going through a recession, and the stock market was nearing the end of a bear market.
In March 2009, the stock market bottomed.
The ensuing rally for the rest of the year was tilted toward stocks with more reward and more risks, not the generally stable dividend stocks.
The DJIA finished 2009 up 18.8%.
Meanwhile, the Dogs of the Dow were up 12.9%.
So far in 2017, the DJIA is up about 18.5%, and the Dogs of the Dow for this year are up almost 10%.
That’s a slightly worse underperformance than in 2009 … but the year isn’t over just yet.
And if the margin of underperformance holds, it likely means the Dogs of the Dow will outperform next year.
Looking Forward to 2018
In 2010, following the worst recent year of underperformance for the Dogs of the Dow, the DJIA still climbed double-digits, ending up 11%.
But, as investors took gains from other Dow stocks, the money was moved into dividend stocks. This helped propel the Dogs of the Dow to beat the DJIA by posting a 15.5% increase for the year.
Assuming investors follow a similar trend, and revert back to solid dividend-paying companies, we can expect the Dogs of the Dow to outperform in 2018 as well.
I’ll be back after the New Year with a further breakdown of the current Dogs of the Dow, which ones meet the list and what kind of expectations we have for them.
Until then, this is a strategy you want on your radar for next year.
Chad Shoop, CMT
Editor, Automatic Profits Alert