The Dogs of the Dow theory has been a popular tool in the financial market. But while the theory is simple, there have been mixed findings on its validity. Using U.S. data from 2000 through 2017, this paper identifies how consistently an investment strategy that follows the Dogs of the Dow theory outperforms the average market. The results show that the theory has not worked well in the recent U.S. market when trading costs and taxes are included. Rather, holding an equally weighted investment of all firms is more likely to outperform the Dow Jones Industrial Average index and the Dogs of the Dow strategy in the long term.

One of popular theories in technical analysis is the Dogs of the Dow (DoD) theory. According to this strategy, the average market can be outperformed using 30 firms of Dow Jones Industrial Average (DJIA) index. Since DoD was introduced, there have been numerous studies on the validity of the theory. However, only contradicting results have been found, so the research has produced no robust consensus on the theory. In addition, most of the research was performed using aggregate stock market data. The purpose of our research is to determine whether the DoD theory is valid at the sectoral level. We find that returns of top 5 highest dividend-yield firms are higher than average return of each sector. However, the additional returns of those 5 firms are not meaningful enough if we take into account tax on profits and trading costs, which does not validate the DoD theory at the sectoral level.