The S&P 500 Index is notching new all-time highs on a nominal basis and — as of this writing — the Dow Jones Industrial Average isn’t far behind, led by a motley group of defensive names that will continue to prosper in the third quarter.
Make no mistake, investors need stocks that can outperform the broader market throughout the second half of the year by a wide margin. As impressive as a new record on the S&P 500 might sound, the benchmark index is still up only 4.5% for the year-to-date.
That it’s done so against the background of the crazy U.S. presidential election, Brexit, global economic malaise, negative interest rates and an earnings recession means no one should be surprised if stocks don’t hang on to their gains for all that long.
And yet it’s all this instability and uncertainty that makes some of the best-performing stocks in Dow this year look like keepers even at current levels. Defense, demographics, improving fundamentals are always welcome developments for any name, but large-cap blue chips have a unique appeal when the world looks like it’s going to hell.
Stability, reliability, rock-solid balance sheets, you name it, there is something very comforting about Dow Jones stocks at times like these, and that’s why so many blue chips are clobbering the market this year and will continue to do so under current conditions. Here are the top 10:
Stellar Dow Jones Stocks #10: International Business Machines Corp. (IBM)
Year-to-Date Performance: 13%
Beleaguered International Business Machines Corp. (NYSE:IBM) is having a very strong year so far and continues to build a head of steam. As with some other old-line tech companies, the market is starting to believe in its transformation to a cloud-based services provider.
The mantra is cloud, analytics, mobile and security; and although it’s been a painful, rocky process, some investors see an inflection point emerging in IBM’s revenue mix. Earnings per share is expected to start growing again in fiscal 2017, and the stock is rising ahead of that promise.
With a year-to-date gain of 13% and a dividend yield of 3.63%, IBM is suddenly a total return machine.
Stellar Dow Jones Stocks #9: Merck & Co., Inc. (MRK)
Year-to-Date Performance: 13%
Pharmaceutical giant Merck & Co., Inc. (NYSE:MRK) is having a sneaky good year. Shares are up 13% so far in 2016 and are shooting toward a 52-week high.
Factor in the 3%-plus dividend yield and MRK’s price momentum into the second half should let it extend its lead over the broader market.
Investors are pleased with the growth MRK is seeing in sales of key drugs like Januvia, Janumet and Keytruda. They’re also more optimistic about the pipeline. Cost controls are always welcome too.
MRK is forecast to post earnings per share of $3.72 this year, up from $3.59 a share, even as revenue remains essentially unchanged.
Stellar Dow Jones Stocks #8: Caterpillar Inc. (CAT)
Year-to-Date Performance: 15%
After two years of miserable trading, it’s starting to look like the very worst is over for Caterpillar Inc. (NYSE:CAT). Yes, the same old worries about China remain, but around the edges at least, CAT is benefitting from some encouraging signs.
Prices for crude oil and other commodities have either stabilized or reversed trend, and that’s the single biggest headwind for CAT stock. At the same time, although key sales metrics continue to decline, the rate at which they’re doing so is decelerating.
CAT has been down so hard for so long that “less bad” is very good. Cost cuts are also going well, helping shares rise 15% so far this year.
Stellar Dow Jones Stocks #7: Chevron Corporation (CVX)
Year-to-Date Performance: 18%
As an integrated oil major Chevron Corporation (NYSE:CVX) was always somewhat better insulated from the rout in oil prices, and now that they appear to have bottomed, it has ample room to rebound.
CVX is up 18% for the year-to-date on the recovery in prices for crude oil, which are expected to continue to rise through year-end and beyond. As a result, Wall Street expects a big leap in earnings per share next year. Analysts expect full-year 2017 EPS to grow to $4.74 from the $1.20 expected this year.
Investors love easy year-over-year comparisons and if commodity markets comply, CVX stock will continue to rise in anticipation.
Stellar Dow Jones Stocks #6: 3M Co (MMM)
Year-to-Date Performance: 18%
Shares in boring old 3M Co (NYSE:MMM) are up more than 18% so far this year, sport a decent dividend yield of 2.51% and the Street is bullish on its shorter-term prospects too.
3M faces the same risks as any other international industrials name — forex, the Brexit, economic malaise — but it’s still churning out solid profits. EPS is expected to rise 9% this year and 8% in 2017. Best of all, MMM is doing it mostly with organic growth.
The market cheers organic growth because, well, acquisitions are expensive. Cost controls are another part of the story. The bottom line is MMM generated $5 billion in free cash flow over just the past year.
Stellar Dow Jones Stocks #5: UnitedHealth Group Inc (UNH)
Year-to-Date Performance: 19%
UnitedHealth Group Inc (NYSE:UNH) has a lot going for it these days. For one thing, it’s the only top five health insurer not struggling to close a pricey acquisition. It’s also pulled out of offering Affordable Care Act plans, which reduces a drag on results.
And, of course, it benefits from the perception that it’s a safety stock. When growth is scarce and the econ outlook is mixed, investors are willing to pay up for supposed safe harbors. Brexit fears and mixed U.S. economic data have a number investors worried about recession.
UNH is expected to post outsized earnings growth this year on strong revenue growth. No wonder shares are up 19% YTD.
Stellar Dow Jones Stocks #4: Johnson & Johnson (JNJ)
Year-to-Date Performance: 20%
Johnson & Johnson (NYSE:JNJ) is up 20% for the year-to-date and its price momentum is accelerating. Few saw that coming after it had such a disappointing 2015.
Sure, as a healthcare company, JNJ benefits from gains in the broader sector and well long-term demographic trends. But the attraction rightfully comes down to its solid profit growth in the midst of an earnings recession … and a lack of alternatives. Bonds are so ugly that investors are forced to embrace more defensive equities.
Medical devices, pharmaceuticals and consumer staples are better equipped to withstand global sluggishness and any impact from the Brexit. With such a widely diversified portfolio, JNJ offers more protection than many sector names.
Stellar Dow Jones Stocks #3: Exxon Mobil Corporation (XOM)
Year-to-Date Performance: 21%
The bull case for Exxon Mobil Corporation (NYSE:XOM) is pretty much the same one for Chevron. Energy prices are slowly but surely recovering. And, like CVX, parts of the highly diversified oil major actually benefit when oil prices are lower.
Indeed, in the most recent quarter, fatter margins in the chemicals segment propelled XOM to Street-crushing profits. That’s a big part of why the stock has gained 21% so far this year.
The remainder of the year looks like a winner, as well. If nothing else, investors are starved for yield and XOM offers one of the better blue-chip dividends.
Stellar Dow Jones Stocks #2: Wal-Mart Stores, Inc. (WMT)
Year-to-Date Performance: 21%
After last year’s punishing selloff, shares in Wal-Mart Stores, Inc. (NYSE:WMT) are benefitting as a rebound play. More importantly, they appear to still have value in them even after rising more than 21% so far this year.
A market desperate for names with low volatility realizes that it went overboard with last year’s pounding. The headwinds of higher wages, stronger dollar and online competition have been more than adequately factored into the share price.
Best of all, WMT’s turnaround story is starting to take hold. As it should, a projected swing back to EPS growth next fiscal year has the market positioning itself today.
Stellar Dow Jones Stocks #1: Verizon Communications Inc. (VZ)
Year-to-Date Performance: 21%
Defensive sector, low volatility and a fat dividend yield? Verizon Communications Inc. (NYSE:VZ) checks all the boxes on the list.
That helps explain why a generally poky telecommunications stock is one of the best performing Dow Jones stock this year with a gain of 20%. And that’s not all: A dividend yield of 4.04% is juicing total returns.
VZ has some fundamental tailwinds heading into the quarter. It has pricing power, a credible mobile advertising strategy and is overflowing with cash. Analysts expect the company to generate free cash flow of about $6 billion over the next two quarters.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
