As the calendar turns to 2022, some of the so-called Dogs of the Dow could be poised to have their day in the sun. The Dogs strategy, popularized three decades ago, involves taking the 10 Dow Jones Industrial Average stocks with the highest dividend yields and betting on them to outperform in the next year. Companies are reluctant to cut dividends, so those with the highest yields tend to be those whose stocks have underperformed or even fallen. That makes the Dogs of the Dow something of a contrarian play heading into a new year. In recent years, the strategy has struggled overall but has surfaced a few big winners. For example, Cisco performed well enough in 2021 to pull itself out of the Dogs list for next year. "They're dogs for a reason, but when you have these great companies with incredibly long and stellar track records, they have bumps along the way but can respond," said Kevin Simpson, founder and chief investment officer of Capital Wealth Planning. Simpson, whose firm owns Chevron , Verizon and Dow Inc. from 2022's list, does not recommend following the strategy wholesale but said investors should remember "not all Dogs have fleas." "If you look at those 10 as candidates to choose from, and then dig in, roll your sleeves up ... you should be able to find some really good stocks," he said. The top dog for 2022, measured by dividend yield, is chemical company Dow Inc. The name was also on last year's list and went nowhere, with a year-to-date price return that is slightly negative. Wall Street is mixed on Dow overall, with 56% of analysts having a hold or neutral rating on the stock. However, the average price target is hovering near $66 per share, representing upside of 20%. One of the Dogs with a higher approval rating from Wall Street is pharma giant Merck , with a buy rating from 62% of analysts. Merck had a brief rally earlier in the fourth quarter, breaking above $90 per share in early November, but was trading below $80 on Monday. Chevron is one of the stocks on the list despite a stellar 2021, rising roughly 38% year to date as oil demand has rebounded. However, the name has underperformed the energy sector as measured by the Energy Select Sector SPDR Fund . In 2022, expected interest rate hikes from the Federal Reserve could be good news for dividend payers. Stocks with solid dividend yields could perform better when interest rates are rising, thus driving down the value of bonds, Simpson said. "Dividends, especially in really mature, blue-chip, well-established companies, can be a true proxy for income," he said.
A Lakeland Terrier races during the 8th Annual Masters Agility Championship at the 145th Annual Westminster Kennel Club Dog Show on June 11, 2021 at the Lyndhurst Estate in Tarrytown, New York.
Timothy A. Clary | AFP | Getty Images
As the calendar turns to 2022, some of the so-called Dogs of the Dow could be poised to have their day in the sun.