Michael O’Higgins might not be a household name. But some believe he should be. After all, he might have achieved something that nobody else has done. In 1978, he devised a strategy that he declared would beat the Dow and the S&P 500. There’s nothing new about that. Plenty of money managers claim they own a secret sauce. Some do well for a handful of years– until the market bites them back. Investment graveyards are filled with would-be legends. Many employed complicated methods: shorting the market; using leverage; utilizing quant-based projections and fancy algorithms. But like the Greek legend, Icarus, they eventually fell to Earth.

Michael O'Higgins

O’Higgins is different for a couple of reasons. For starters, he didn’t guard his secret. His 1991 book, Beating the Dow,described how average investors could beat the market. His method was also simple. Investors wouldn’t need to follow the economy or research individual stocks. It takes just 10 minutes a year. And yes, after the book’s 1991 publication, it continued to beat the market.

The method was dubbed, “Dogs of the Dow.” It has two variations. The first requires that investors buy the ten highest dividend-yielding stocks on the DOW. O’Higgins refers to these as Dogs-Of-The-Dow-Ten (DOTD10). At the end of the year, if any of these stocks are no longer among the Dow’s 10 highest dividend yielders, investors sell those stocks, trading them for the Dow stocks that meet the requirement.

From January 1973 until August 28, 2019, this strategy averaged a compound annual return of 13.25 percent. In contrast, the Dow Jones Industrials and the S&P 500 index averaged compound annual returns of 10.7 percent and 10.29 percent respectively.

In Beating the Dow, O’Higgins also introduced a second variation. It’s one that he claimed might be even better. It requires looking at the ten highest dividend-yielding stocks on the Dow and selecting the 5 lowest-priced stocks (DOTD5) based simply on price. If, at the end of the year, any of these stocks no longer meet the original criteria, investors would sell them for the stocks that do. Over the same time period, the Dogs of the Dow 5 averaged a compound annual return of 14.53 percent.

In a tax-deferred account, both strategies would have dusted the Dow and the S&P 500.

U.S. Stock Indexes vs. Dogs of the Dow
January 1973 to August 28, 2019

U.S. Stock Indexes vs. Dogs of the Dow

I asked Michael O’Higgins why it works. This is what he said:

  1. Dividends on blue chip stocks are very stable because the companies that pay them are very careful not to raise them to unsustainable levels because they never want to have to reduce them.
  2. Because the dividends of blue chip stocks are stable and stock prices are volatile, when dividends are high it means that stock prices are low.
  3. Dividend yields are a more reliable indication of a stock's cheapness or richness than earnings or book value because dividends are cash and not subject to manipulation by accountants.
  4. A high dividend allows an investor to get paid while he or she is waiting for the stock's price to rise.

The Dow Jones Industrials are business heavyweights. They tend to have solid balance sheets and solid business earnings. In other words, they’re a lot like castles surrounded by wide, deep moats. That doesn’t mean competitors can’t attack their fronts. Nor does it mean these businesses don’t sometimes face internal struggles.

But if they don’t cut their dividends during duress, it often proves they have deep financial pockets. As a result, they can often weather storms. When a Dow stock’s share price drops, and the dividend stays the same, the dividend yield rises. That’s what makes the stock attractive to a man like O’Higgins. Management (sometimes new management) often sweeps in and kicks the company in the rump. Sometimes it takes a year. It might take as long as five. But it’s often enough to push the share price back up.

Plenty of people ask, “If it’s this simple, why don’t more people invest in the Dogs of the Dow?” For starters, the Dogs of the Dow are beaten down stocks that almost nobody really wants. They’re the ugly ducklings of the investment world. Investors who buy these stocks rarely have the courage to hold them for long. If the Dogs of the Dow don’t win right away, most of the investors who adopt this strategy toss in the towel long before they see the gains.

But if you don’t care what people think and you have discipline to spare, the Dogs of the Dow might become your best friends. The website, dogsofthedow, tracks the strategies’ year-to-year performances. They also list the current Dogs of the Dow, which you can see below.

I believe the Dogs of the Dow will continue to beat the market long term. But this strategy won’t work for people without nerves of steel. It takes just ten minutes a year. But it requires Buddha-like discipline behind the trader’s helm. So, when you look in the mirror, does a Buddha stare back?

Dogs of The Dow 10

Ticker Symbol Company
DOW Dow
XOM ExxonMobil
IBM International Business Machines
VZ Verizon
CVX Chevron
PFE Pfizer
MMM 3M
WBA Walgreens
CAT Caterpillar
JPM JP Morgan Chase

Dogs of The Dow 5

Ticker Symbol Company
DOW Dow
XOM ExxonMobil
VZ Verizon
PFE Pfizer
WBA Walgreens

Dogs of the Dow Performances Ending January 2019<

Compound Annual Return 1 Year 3-Years 5-Years 10 Years Since January 2000
Dogs of the Dow 10 0.0% 14.8% 11.6% 15.6% 9.0%
Dogs of the Dow 5 0.8% 9.3% 10.5% 15.9% 10.0%
Dow Jones Industrials -3.5% 13.7% 10.3% 13.6% 7.5%
Vanguard’s S&P 500 Index -4.5% 9.7% 8.7% 13.5% 6.3%

Annual Dogs of the Dow Performances
January 1973 – August 28, 2019

Year S&P 500 Dow Jones Industrials Dogs of the Dow 10 Dogs of the Dow 5
1973 -14.69% -13.12% 3.90% 19.64%
1974 -26.47% -23.14% -1.30% -3.80%
1975 37.23% 44.40% 55.90% 70.10%
1976 23.93% 22.72% 34.80% 40.80%
1977 -7.16% -12.70% 0.90% 4.50%
1978 6.57% 2.69% -0.10% 1.70%
1979 18.61% 10.52% 12.40% 9.90%
1980 32.50% 21.41% 27.20% 40.50%
1981 -4.92% -3.40% 5.00% 0.00%
1982 21.55% 25.79% 23.60% 37.40%
1983 22.56% 25.68% 38.70% 36.10%
1984 6.27% 1.05% 7.60% 12.60%
1985 31.73% 32.78% 29.50% 37.80%
1986 18.67% 26.92% 32.10% 27.90%
1987 5.25% 6.02% 6.10% 11.10%
1988 16.61% 15.95% 22.90% 18.40%
1989 31.69% 31.71% 26.50% 10.50%
1990 -3.10% -0.58% -7.60% -15.20%
1991 30.47% 23.93% 39.30% 61.90%
1992 7.62% 7.35% 7.90% 23.20%
1993 10.08% 16.74% 27.30% 34.30%
1994 1.32% 4.98% 4.10% 8.60%
1995 37.58% 36.49% 36.70% 30.50%
1996 22.96% 28.61% 27.90% 26.00%
1997 33.36% 24.74% 21.90% 20.02%
1998 28.58% 17.90% 10.60% 12.30%
1999 21.04% 26.90% 3.60% -4.50%
2000 -9.10% -4.41% 5.56% 10.21%
2001 -11.89% -5.36% -5.69% -3.96%
2002 -22.10% -14.92% -8.68% -10.54%
2003 28.68% 27.79% 27.77% 22.45%
2004 10.88% 5.16% 4.10% 12.01%
2005 4.91% 1.65% -5.09% -0.63%
2006 15.79% 19.05% 30.30% 42.00%
2007 5.49% 8.84% 2.48% 4.24%
2008 -36.99% -31.69% -38.20% -47.82%
2009 26.46% 21.92% 16.57% 19.12%
2010 15.06% 14.10% 21.21% 16.20%
2011 2.11% 8.34% 16.68% 19.50%
2012 16.00% 10.16% 10.25% 11.77%
2013 32.38% 29.63% 35.85% 41.17%
2014 13.68% 10.04% 10.83% 14.29%
2015 1.37% 0.21% 2.63% 10.34%
2016 11.95% 16.50% 20.47% 14.29%
2017 21.82% 28.11% 23.67% 12.81%
2018 -4.39% -3.48% 0.02% 0.81%
YTD Return to 8/28/2019 16.54% 13.32% 11.09% 3.92%
Total Percentage Gain 9552.68% 11375.89% 33171.33% 55883.30%
Compound Annual Return To 8/28/2019 10.29% 10.70% 13.25% 14.53%

Andrew Hallam is a Digital Nomad. He’s the author of the bestseller Millionaire Teacher and Millionaire Expat: How To Build Wealth Living Overseas