The rise and fall of the “Dogs of the Dow”

The Dow Dividend Strategy recommends the highest-yielding stocks from the 30 Dow Industrials. These stocks have come to be known as the “Dogs of the Dow” since they often include some of the previous year’s worst performers. While the strategy’s successes—and more recently, its failures—have been well documented in the popular press, there have not been any convincing explanations of why the strategy worked. This paper demonstrates that the behavior of these stocks is consistent with the market overreaction hypothesis. In years before the stock market crash of 1987, the dogs were indeed “losers” which went on to become “winners.” But in the post-crash period, the high-yield stocks actually outperformed the market during the previous year. The Dow Dividend Strategy is no longer selecting the true dogs.