The Dogs of the Dow: A Must-Have Investment for 2022

The Dogs of the Dow outperformed the rest of the market in 2022.

Contrarian investing outperformed the Dow Jones Industrial Average last year, as investors sought safe havens during volatile market conditions. This is the first time the contrarian strategy has outperformed the Dow since 2018.

The Dogs of the Dow strategy involves buying the 10 stocks with the highest dividend yields of the 30 Dow components at the beginning of a year and holding them over the next 12 months. The group of stocks is rebalanced at the end of every year to maintain an investment in the top 10 dividend payers. That gives investors the benefit of high dividend yields—which is typically a function of low stock prices.

Chevron Corp. and Amgen Inc. both saw double-digit gains in their stock prices, propelling the companies forward.

The Dogs of the Dow rose 2.2% in 2022, including dividends, while the blue-chip index as a whole fell 6.9%. This outperformed the market, thanks to the strong performance of companies like Verizon, Pfizer, and Merck.

The trade was one of the few winners in a year marked by red-hot inflation, higher interest rates and worries about a potential recession. The Dow, along with the broader S&P 500 and Nasdaq Composite indexes, all suffered their worst year since 2008.

"Yield was king last year," said Dan Genter, chief executive of Genter Capital Management. "It's an old dog, not a new trick."

As the Federal Reserve raised interest rates, investors generally abandoned the flashy technology stocks that propelled the stock market’s monster run of the previous decade. Instead, they sought out stocks that were seen as more stable and less likely to be affected by interest rate hikes.

Instead of investing in tech companies, many investors scooped up shares of utility providers, healthcare companies and consumer staples. These companies are known for their steady distribution payments, and many investors believe they are better positioned to withstand a slowdown because consumers rely on their products regardless of the economic environment.

At the end of 2022, each of the Dogs boasted a dividend yield of at least 2.7%. This was well above the 2.1% average yield of all the Dow components and S&P 500's 1.7% yield.

"The Dogs have made a lot of sense as a parking space over the last year," Mark Hackett, chief of investment research at Nationwide, said.

Mr. Hackett said that when he started college in the early 1990s, the Dogs of the Dow were all the rage. He added that he still watches the Dogs closely, and believes that their defensive stocks will continue to outperform the broader market over the next six to nine months.

Some of the best-performing stocks last year were Chevron, which gained 58% on a total-return basis; Amgen, which rose 20%; and IBM, which gained 11%. The biggest losers were Intel, down 47%; 3M, down 30%; and Walgreens, down 25%.

There are new faces in the group for 2023: Cisco Systems Inc. and JPMorgan Chase & Co. have replaced Merck & Co. and Coca-Cola Co.

The Dogs of the Dow have a long history of outperforming the broader market. Over the past 20 years, the Dogs have returned an average of 9.2% including dividends, while the overall index has returned 11%. Last year marked the fifth time in the past 10 years that they beat the blue chips, following 2013, 2015, 2016 and 2018.

There is still some uncertainty surrounding the stock market's future. The Federal Reserve has said that it will continue to raise interest rates, energy prices are still volatile, and the conflict in Ukraine is ongoing. Additionally, China's economy has been somewhat unstable since it reopened.

Mr. Genter warned investors that a stock's high dividend yield could be masking fundamental problems at the company, which could eventually force it to cut the regular payments. He advised against investing in stocks solely based on their dividend yields.

"That's the sleeping dog that wakes up and decides to bite you," Mr. Genter said. He was referring to the potential consequences of taking risks.