Dogs Of The Dow With Covered Calls (2024)

FAQs

Do the Dogs of the Dow strategy still work? ›

The “Small Dogs of the Dow” are the five lowest price stocks among the full pack of 10. Since 1972, the Small Dogs produced an 81,752% cumulative total return, or 13.77% annualized through the end of 2023. That compares to 12.49% annualized for the Dogs of the Dow, 10.89% for the Dow 30 and 10.76% for the S&P 500.

Dogs Of The Dow Strategy With Covered Calls

Fans of the strategy make portfolio adjustments once per year, making sure their holding period is 366 days or more so that they get long term capital gains treatment. Combining the Dogs Of The Dow strategy with a covered call strategy appeals to income-oriented investors.

As with any investing strategy, a covered call strategy may outperform, underperform, or match the market. Generally, covered calls do best in sideways or down markets. Because selling covered calls limits the upside potential, they may underperform during times when the market is rising.

Ford Motor Company (F) Ford Motor Company is undoubtedly one of the best stocks for selling covered calls due to its stable price performance and high liquidity. So far this year the stock has stayed within a range of $11 to $14 a share. Ford's dividend yield stands at around 4%, providing an attractive income stream.

Since 2000, the Dogs of the Dow has had an average annual return of 9.5% and the Small Dogs of the Dow has had an average annual return of 10%, according to dogsofthedow.com. Below are the 10 Dow stocks that qualify for a 2022 Dogs of the Dow portfolio with price/yield indications (the "small dogs" are in red):

For example, since the turn of the century, the Dogs of the Dow had an average annual total return of 8.7%.

Because a trader selling a covered call might be giving up the potential for additional profits if stock XYZ rises above the strike price, the strategy is not appropriate if one thinks the stock has potential for significant gains in the near term.

Disadvantages of covered calls

While there are some benefits, a covered call strategy also has risks to be aware of: Losing out on a possible large share price increase. If the price of the stock in the covered call rises, you may miss out on some—or the bulk—of its gains.

Are Covered Calls a Profitable Strategy? As with any trading strategy, covered calls may or may not be profitable. The highest payoff from a covered call occurs if the stock price rises to the strike price of the call that has been sold and is no higher.

You usually wouldn't want to sell covered calls when the market is very undervalued, for example. Covered calls are a useful tool, and in the hands of a smart investor in the right circ*mstances, can be tremendously profitable.

How to do poor man's covered call? ›

The Poor Man's Covered Call vs a Classic Covered Call

Instead of purchasing 100 shares for a traditional covered call, you buy a back-month call option, typically a deep in-the-money LEAP, and sell a shorter-term out-of-the-money call option on the same stock.

In general, investors can earn an average between 1% to 5% (or more) selling covered calls. How much you earn exactly from this strategy would depend entirely on the volatility of the stock market, the strike price, and the expiration date.

The Dogs of the Dow method has been studied internationally and adapted to many foreign markets. Research shows over long-periods, the Dogs method tends to result in superior risk-adjusted performance relative to market averages. However, the method may also result in more volatility and short-term underperformance.

According to the Dogs of the Dow strategy, investors should buy the 10 Dow stocks with the highest dividend yields each new year. The idea with this strategy is that since the Dow represents blue chips, you're buying solid companies that are trading at a discount, and therefore offer high dividend yields.

The ALPS Sector Dividend Dogs ETF (symbol SDOG on New York; www. alpssectordividenddogs.com), is an example of an ETF that applies the “Dogs of the Dow” theory on a sector-by-sector basis using the stocks in the S&P 500. (Note: There are similar ETFs on TSX.)