Why the 'Dogs of the Dow' Stocks Just Might Deliver in 2025 — Barrons.com

Al Root

The Dogs of the Dow investing theory has been, well, a dog lately. But 2025 just might unleash a win.

The traditional Dogs of the Dow strategy calls for buying the 10 highest-yielding stocks in the Dow Jones Industrial Average at the start of a year, holding them, and reshuffling the portfolio at the start of a new year. It is essentially a contrarian call.

A high dividend yield — a company's annual payout as a percentage of its share price — can be a sign that something is wrong with corporate strategy, growth, management, all of the above, or something else. Buying the Dogs is a bet that things will get better.

As of Friday, with a few days left in the year, the 2025 Dow Dogs, were: Verizon, Chevron, Amgen, Johnson & Johnson, Merck, Coca-Cola, IBM, Cisco, McDonald's, and Procter & Gamble. The 2025 Dogs — those with the highest yields in 2024 — yield an average of about 3.5%, compared with 2% for the overall Dow Jones Industrial Average.

The average yield for dividend-paying stocks in the S&P 500 is about 2.3%, while the average yield for the overall index is about 1.9%. About 80% of S&P 500 companies pay a dividend.

Through Friday, the incoming Dogs — let's call them puppies — had gone up about 5% this year, on average. That compares with a 14% gain for the Dow and a 24% surge in the S&P 500.

The performance of the 2024 Dogs, a list of the highest-yielding stocks in 2023, including Walgreens Boots Alliance, Dow Inc., and 3M, was even worse. The average loss this year was 1%, excluding dividends.

Merck, McDonald's, and Procter & Gamble replaced Walgreens, Dow Inc., and 3M in the new litter of Dogs. Walgreens and Dow left the Dow Jones Industrial Average, while 3M is off the list because it performed well enough to no longer rank among the 10 stocks with the highest yields.

That average loss of 1% leaves the 2024 Dogs far behind the rest of the 30 Dow components. The average change for the other 20 stocks, including some minor adjustments for additions and deletions, is a gain of about 25%.

The strategy just didn't work in 2024. It has been a while since it has.

Through Friday trading, the Dogs had underperformed the Dow by about 14 percentage points this year. They trailed the S&P 500 by about 25 percentage points.

It was the second consecutive year of double-digit percentage point underperformance versus the indexes. In fact, the Dogs of the Dow have underperformed the Dow and S&P 500 in five of the past six years.

Still, there is a little reason for optimism. The 2025 Dogs trade for an average of about 16 times the per-share earnings expected for the coming year, compared with about 22 times for the S&P 500. That is similar to the gap headed into 2022, when the Dogs outperformed the S&P 500.

The reason the Dogs have outperformed recently isn't hard to determine. The list is full of energy, consumer staples, and healthcare names, while investors have been focused on artificial intelligence and the Magnificent Seven lately.

No one is saying investors should abandon what has worked for them. Still, it is a good idea to search for new ideas at the start of a year.

Investors not interested in the whole list of Dogs can narrow their options using Wall Street ratings to find the shares analysts are most positive about. The average Buy-rating ratio for the 2025 Dogs is about 58%, compared with about 68% for stocks in the Dow.

But two Dogs have above-average Buy-rating ratios: Coca-Cola and Merck. About 76% and 81% of analysts covering those stocks rate them at Buy, respectively.

Both of those stocks yield north of 3%. While it is impossible to know how 2025 will turn out for the market, it could be nice to get paid while waiting to find out.

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

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.