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All Contents © 2020The Kiplinger Washington Editors
By Michael Kahn, Contributing Writer
| January 10, 2020
It's that time of year when Wall Street offers up its many forecasts for the coming 52 weeks, based on anything from earnings growth to interest rates to the possibility of a coming recession – and in 2020, the incessant noise coming from Washington.
Investors are glued to their screens waiting for these oft-faulty prognostications. That's unfortunate, because there's a better way to plan out your year: the Dogs of the Dow.
The Dogs of the Dow is a set-it-and-forget-it plan involving Dow dividend stocks (more on that in a minute). It takes decision-making out of your hands by deferring to the market itself. As long as three concepts are true – the market moves higher in the long run, stocks move into and out of favor, and Dow companies tend to be blue-chip stocks that are intelligently managed and financially stable – the Dogs will do well over time.
That third concept might be debatable when you look back on all the companies that have been booted from the Dow. Remember: General Electric (GE) and Sears (SHLD) used to be members. But for the most part, the Dow remains a blue-chip index.
Read on as we explain the Dogs of the Dow, then analyze the 10 Dow stocks this strategy says you should buy.
Data is as of Jan. 5, except yield, which is as of Jan. 1. Stocks listed by dividend yield. Yields are calculated by annualizing the most recent payout and dividing by the share price.
The Dogs of the Dow is a popular approach to picking stocks that are likely to outperform the market in the coming year. It calls for investing equal amounts each January in the 10 Dow stocks with the highest dividend yields, then holding them until the following January.
The premise: The Dow stocks with the highest yields likely did not perform well in the past year. (Remember: As prices go up, yields go down, and vice versa.) Also, because the Dow is made up of strong, blue-chip companies, mean reversion should take hold as investors realize these quality names are on sale.
The Dogs of the Dow don't win every year. In 2019, the Dogs lost to the market, but even so, they offered a respectable return of 15.6% vs. the Dow Jones Industrial Average's 22.4%. Add in dividends, and the gap closed a bit, with the Dogs returning 19.1% to the Dow's 24.6%.
But in 2018, they lost just 1.5% on average versus a 5.6% decline for the Dow and a 6.2% drop for the S&P 500. That marked the Dogs' fourth consecutive year of outperformance at the time.
So if you are at all concerned with a potential stumble in a record-breaking aged bull market, then the Dogs will let you sleep at night.
Let's move on to the picks.
Market value: $234.3 billion
Dividend yield (as of 1/1): 2.9%
Forward price-to-earnings (P/E): 24.3
Coca-Cola (KO, $54.69) has had to fight a protracted consumer change away from sugary soda to healthier options. While its stock had a decent year, with roughly 17% gains in 2019, it still underperformed the broader market by a wide margin.
The company pushed further into coffee, juices, water and tea in 2019, but despite popular trends, it has declined to enter the CBD-infused beverage market. Coca-Cola is, however, expected to make splashes in two growth markets early in 2020: energy drinks and flavored seltzer waters.
The more important aspect for investors is its dividend-paying power and history. Not only is Coca-Cola a Dividend Aristocrat – one of the 57 S&P 500 companies that have raised their dividends annually for at least 25 years – but it's the cream of the Aristocrat crop. KO has improved its payout for 57 consecutive years, putting it among Dividend Kings that have kept the pedal down on their dividends for at least a half-century.
Right now, KO is pricey, at more than 24 times analysts' expectations for Coca-Cola's next 12 months of profits. But investors don't seem to mind, as the stock recently broke out to fresh all-time highs and boasts a strong chart.
Market value: $202.1 billion
Forward P/E: 14.6
Cisco Systems (CSCO, $47.63) manufactures networking hardware and other communications products and services, and more recently, it has been moving into cybersecurity.
It's hard to sell this stock as a dividend champion considering its modest 2.9% yield, but free cash flow (which pays the dividend bills) has been solid and growing. Barclays recently increased its target stock price on CSCO based on valuation and "the promise of a recent round of product announcements." Cisco already has a diversified product mix and is looking to fill in some of its gaps. The new 8000 router series, for instance, should gain traction in a tech upgrade cycle with gains in 5G-based traffic.
But the point of the Dogs of the Dow strategy is to buy blue-chip Dow stocks after they have a rough year. After a lousy 11% performance in 2019 that included a 17% drop since February, CSCO qualifies.
Market value: $52.5 billion
Dividend yield (as of 1/1): 3.1%
Forward P/E: 9.9
Walgreens Boots Alliance (WBA, $59.08) operates a large chain of retail pharmacies worldwide, as well as a pharmaceutical wholesale operation.
Walgreens' 2019 troubles really took off in April, as WBA tumbled on an earnings miss and slashed guidance. After spending much of the year bumping along the bottom, the stock managed to claw its way back to pre-earnings price levels. However, it still finished the year with a 14% decline and is in the lower half of its 52-week price range.
Again, weak performance is at the heart of the Dogs of the Dow strategy. Beaten-down stocks have the most potential to rebound, even if only to revert somewhat to the mean. This is especially true when merger-and-acquisitions (M&A) rumors abound, which they do with Walgreens at the moment. JPMorgan analysts believe a buyout could be worth up to $75 per share, so it's not a bad risk, and you're getting paid more than 3% to wait it out.
Market value: $102.6 billion
Dividend yield (as of 1/1): 3.3%
Forward P/E: 18.5
3M (MMM, $178.45) – an industrial conglomerate responsible for a load of consumer brands, too, such as Post-it Notes and Scotch tape – was one of the weakest stocks in the Dow this past year, losing more than 7%. That included a beating in April alongside WBA after its guidance disappointed the analyst community.
MMM also does a lot of business with China, so the trade war was a drag, as was a slower global economy.
But as trade war uncertainties have taken their toll on the downside, the potential for resolution has started to spark some gains. In late December, 3M's stock jumped higher on news of a possible "phase one" deal with China.
From an income point of view, 3M is as consistent as they come. It has paid a dividend for more than a century without interruption, and that regular check has gotten bigger each year for more than six decades.
Market value: $215.4 billion
Dividend yield (as of 1/1): 3.9%
Forward P/E: 13.6
Pfizer (PFE, $38.93) began a companywide restructuring in 2019, creating three divisions: one for established medicines, one for "innovative" medicines and a third for consumer health-care products. It plans to do more in the coming year. Specifically, Pfizer wants to spin off its generic and off-patent drugs business (Upjohn) and merge it with Mylan (MYL) to form a new company, called Viatris, while keeping a minority interest for itself.
Basically, Pfizer is positioning itself as a pure-play pharmaceutical company, best able to take advantage of the industry's growth.
Wall Street wasn't exactly enthused in 2019. PFE stock floundered all year and finished the stock off 10%. However, that has inflated Pfizer's yield up to a juicy 3.9%.
Market value: $228.8 billion
Dividend yield (as of 1/1): 4.0%
Forward P/E: 17.2
Chevron (CVX, $121.01) is one of the largest integrated energy companies in the world, but its stock spent much of 2019 in a "trading range," where shares essentially move up and down between two prices. Its 11% performance in 2019, while wildly below the market, was actually better than many energy stocks.
Chevron also essentially "ripped the bandage off" in December by writing down $10 billion in non-performing assets, mostly in shale and natural gas. It's a painful decision, but the right one. By acknowledging the hard truth and taking its lumps, Chevron clears the decks for an improvement in strategy, rather than having to hold on to bad decisions.
For a dividend strategy, CVX is a winner. It pays a reliable quarterly dole and is a member of the Dividend Aristocrats. And it has figured out how to make enough cash to keep delivering that payout, even when oil prices are less than ideal.
Market value: $249.8 billion
Forward P/E: 12.3
Verizon (VZ, $60.40) is one of the giants of America's telecommunications industry. Many individuals know it from its wireless telephone, Internet, cable and landline services.
Lately, however, Verizon's name has been most closely associated with Disney (DIS). The telecom has offered Disney's new streaming services, Disney+, for free to new and existing Verizon Wireless Unlimited customers, new Fios Home Internet customers, and new 5G Home Internet customers.
The entire telecommunications industry has been preparing for the coming of 5G technology, and Verizon is no different. The company has been realigning its segments since April 2019, streamlining its operations to serve all classes of customers. It's also making progress on cost cutting. And most importantly, it's building out and rolling out 5G service.
Verizon does not expect a large impact from 5G in the coming year, but does it expect to meaningfully contribute to revenues in 2021.
In the meanwhile, it's cheap, at just 12 times next year's earnings expectations, and it offers more than 4% in annual yield.
Market value: $119.0 billion
Dividend yield (as of 1/1): 4.9%
Forward P/E: 10.0
International Business Machines (IBM, $134.34) spent most of 2019 marking time in terms of share price. Indeed, the mega-cap tech firm hasn't been able to get out of its own way for the past few years.
IBM is at least expected to turn things around in 2020, with analysts projecting growth on both the top and bottom lines. The former – revenues – would be an important development, as the company is in the midst of a five-quarter streak of sales declines.
Make no mistake: IBM is plagued with legacy technology, although it is making the attempt to move into more forward-thinking areas, such as using seawater in new battery technology. But given IBM's significant dividend yield of nearly 5% and fairly low valuation by earnings, investors can sit on the income and not have to rely on red-hot price growth.
Market value: $297.6 billion
Dividend yield (as of 1/1): 5.0%
Forward P/E: 18.0
Even though many Big Tech companies have eclipsed it, Exxon Mobil (XOM, $70.33) remains one of the most valuable companies in the U.S. and is among the world's largest integrated energy companies.
Interestingly, while Exxon was rightfully heaped into the pile of companies responsible for the huge carbon footprint of fossil fuels, the company has been investing at least $1 billion annually for years in alternative energy projects. It's even using alternative energy in traditional oil projects; it plans to use power generated by wind and solar to expand its Permian Basin operations.
In following with what its customers want, Exxon's energy mix is already changing from oil and coal to more natural gas and a growing contribution from nuclear, wind solar and other renewables.
Exxon, like other energy stocks, had a disappointing 2019 with just 2% price gains. But its shares enter 2020 as one of the highest-yielding Dogs of the Dow, at 5.0%.
Market value: $38.9 billion
Dividend yield (as of 1/1): 5.2%
Dow Inc. (DOW, $52.42) has had a complicated relationship with DuPont de Nemours (DD). They were rivals. Then they married. And now they've broken up again. (That's why, if you look, you'll find now trading history for DOW shares beyind April 2019.)
Right now, Dow is materials science company, operating in three business segments: Performance Materials & Coatings, Industrial Intermediates & Infrastructure, and Packaging & Specialty Plastics.
One initiative that fits nicely into today's socio-business climate is Dow's current testing of technology, called chemical recycling, that breaks down plastics for reuse as new plastics. The process is supposed to be superior to existing mechanical technology, which returns a lower-grade product.
Dow Inc. – with a beefy yield and a long history as a blue chip, even if its timeline has been disrupted by its forbidden love with a rival – fits the bill as a solid company that just hasn't performed in a while.