The Dogs of the Dow is a long standing wall street strategy for investing in the stock market that involves purchasing the 10 highest yielding Dow Jones Industrial Average ($DOWI) (DIA) stocks. The DJIA is a stock market index that consists of 30 large publicly traded companies listed on the New York Stock Exchange and the NASDAQ 100 Index ($IUXX) (QQQ).

The Dogs of the Dow strategy is based on the idea that the high dividend yield of these stocks indicates that they may be undervalued by the market and are likely to outperform in the future. The strategy involves rebalancing the portfolio at the end of each year to ensure that it still includes the 10 highest yielding DJIA stocks.

The Dogs of the Dow strategy has been popular with investors as a way to potentially generate income and outperform the market. However, like all investment strategies, it carries risks and may not always be successful.

So, what are the 10 highest yielding stocks in the Dow right now? We can use the Stock Screener to find all the Dow stocks and include a column for Annual dividend yield.

Then for the results, we select Filter View and sort by Dividend Yield.

So our 10 Dogs of the Dow for 2023 are:

Walgreens (WBA)

Verizon (WBA)

3M Company (MMM)

Dow (DOW)

International Business Machines (IBM)

Chevron (CVX)

Coca-Cola Company (KO)

Amgen (AMGN)

Cisco (CSCO)

Johnson & Johnson (JNJ)

As shown in the above table, there are some very healthy dividend yields on offer. One way to further enhance this yield is by selling covered calls.

Some people like to sell monthly covered calls, but that can require ongoing maintenance and monitoring. Today, we’re going to look at a yearly covered call for those that like a more set and forget approach.

Walgreens Yearly Covered Call Example

Let’s use the first stock on the list, Walgreens, and look at an example.

Buying 100 shares of WBA would cost around $2,600. The January 17, 2025, call option with a strike price of $27.50 was trading yesterday for around $3.65, generating $365 in premium per contract for covered call sellers. 

Selling the call option generates an income of 16.31% in 394 days, equalling around 15.07% annualized. 

That assumes the stock stays exactly where it is. What if the stock rises above the strike price of $27.50?

If WBA closes above $27.50 on the expiration date, the shares will be called away at $27.50, leaving the trader with a total profit of $512 (gain on the shares plus the $365 option premium received). That equates to a 22.88% return, which is 21.14% on an annualized basis. 

That doesn’t include dividends. WBA is estimate to pay around $1.92 in dividends over the next 12 months which would increase the income potential by 7.69% per annum.

Let’s look at another example using Intel.

Verizon Yearly Covered Call Example

Buying 100 shares of VZ would cost around $3,750. The January 17, 2025, call option with a strike price of $38 was trading yesterday for around $2.65, generating $265 in premium per contract for covered call sellers. 

Selling the call option generates an income of 7.60% in 394 days, equalling around 7.03% annualized. 

That assumes the stock stays exactly where it is. What if the stock rises above the strike price of $38?

If VZ closes above $38 on the expiration date, the shares will be called away at $38, leaving the trader with a total profit of $315 (gain on the shares plus the $265 option premium received). That equates to a 9.04% return, which is 8.35% on an annualized basis. 

That doesn’t include dividends. VZ is estimate to pay around $2.62 in dividends over the next 12 months which would increase the income potential by 6.96% per annum.

Selling covered calls in 2024 on the Dogs of the Dow stocks, could be a great strategy for generating income and building long term wealth.

Please remember that options are risky, and investors can lose 100% of their investment.  This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.

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