The 2021 Dogs of The Dow

A view of the New York Stock Exchange

Kena Betancur / AFP via Getty Images

2020 has been a wild year. Look no further than the Dogs of the Dow for evidence.

The Dogs of the Dow have preformed, well, like dogs in this year, losing investors about 7% year to date. That lags behind the 8% comparable gain of the Dow Jones Industrial Average and 16% gain of the S&P 500.

The Dogs, of course, is a time tested investment strategy which buys the 10 highest dividend yielding stocks in the Dow. High dividend yields usually mean low valuations and (or) something is going wrong at the companies. That makes Dogs of the Dow a classic value-oriented, contrarian investing strategy. Contrarian investors, often times, will pick recent losers, stocks shunned by others, believing things will return to normal.

It hasn’t worked out in 2020. But this year has been far from normal. And good things tend to happen to cheap stocks. So after a year of underperformance in 2020, the Dogs can hopefully perform well in 2021.

The 2020 Dogs were: DOW (ticker: DOW), Exxon Mobil (XOM), International Business Machines (IBM), Chevron (CVX), Pfizer (PFE), 3M (MMM), Walgreens Boots Alliance (WBA), Cisco Systems (CSCO), Coca-Cola (KO), and Verizon Communications (VZ).

Two of those companies aren’t even in the Dow any longer. Exxon and Pfizer were replaced by Salesforce.com (CRM) and Amgen (AMGN). ( Honeywell International (HON) also replaced Raytheon Technologies (RTX) in the Dow this year.)

Salesforce.com doesn’t even pay a dividend. And two other Dow components suspended their dividends amid global pandemic: Disney (DIS) and Boeing (BA). It has been a wild year indeed.

For the 2020 Dogs, half have produced negative returns. The other half are up. The average drop of the five losers is 17%. The average gain for stocks up is only 4%. The worst performers have been Exxon and Walgreens. The top performers have been Pfizer and Dow.

Several of the 2021 Dogs carry over from this year including: Chevron, IBM, Dow, Walgreens, Verizon, 3M, Cisco and Coca-Cola. Merck (MRK) and JPMorgan Chase (JPM) are the two new additions.

Each of the 2021 stocks has a specific story. Coca-Cola, for instance, can benefit from sporting events and concerts restarting. Walgreens can benefit from vaccine administration. But the Dogs of the Dow doesn’t require investors to think about individual stocks. That is the beauty of a strategy like the Dogs. It’s offers a consistent way to rebalance a portfolio and add names that have the potential to rebound.

Consistency is a key characteristic of successful investors. But as many long time investors know, it’s hard to stay consistent amid market volatility or losses or underperformance compared with other areas of the stock market.

And, of course, the Dogs strategy has worked. Coming into 2020, the Dogs outperformed Dow in seven of 10 years. Now that is seven out of the past 11. That is not bad. But the 15 percentage point underperformance gap in 2020 has taken its toll.

Coming into 2020, $10,000 invested in the Dogs at the beginning of the decade turned into about $40,100. For the overall Dow, $10,000 became about $35,500. With 2020 returns added in, the Dow has the overall edge on the Dogs at about $38,700 to $37,700.

Still, now the strategy has only lagged behind by about $1,000 over 11 years. That is not a high price to pay for peace of mind. Something automatic stock allocations can offer.

Write to Al Root at allen.root@dowjones.com