It’s a new year, and with it comes a new list of the “Dogs of the Dow.” The Dogs of the Dow is an investment strategy whereby investors buy the highest dividend-yielding stocks in the Dow Jones Industrial Average.
This strategy was popularized in the early 1990s and has proven to be quite efficient. There is even a website devoted to the strategy. Typically, a high dividend yield is indicative of low valuations and that there is an underlying problem with a stock. However, the Dogs of the Dow strategy assumes that the chosen “dogs” have the potential to reward investors in two ways — through substantial increases in their stock prices and with high dividend payouts.
For this reason, the Dogs of the Dow is often referred to as a “contrarian investment strategy,” or one that goes against conventional wisdom.
The dogs strategy has proven to work. Investors who put $10,000 into the Dogs of the Dow in 2010, for example, would have ended up with $37,400 at the end of 2020. The same $10,000 invested in the entire Dow Jones Industrial Average would have been worth $38,400 by the end of last year. That’s a difference of only $1,000 over a decade.
In this article, we look at seven Dogs of the Dow that investors should consider for the year ahead.
Dogs of the Dow 2021: Chevron (CVX)
Dividend Yield: 5.66%
Like most energy stocks, 2020 was tough for Chevron. The San Ramon, California-based oil and gas company saw its stock price fall 58% last March as markets around the world tumbled and oil prices cratered.
While CVX stock has managed to rebound to $87 a share, it remains nearly 30% below its 52-week high of $121.67. This, combined with a dividend yield of 5.66%, makes Chevron the top dog of the Dow Jones Industrial Average for 2021.
Not only does Chevron’s stock price have more room to run in 2021 as energy prices rebound, but the company pays the highest dividend yield among the 30 large-cap stocks that comprise the Dow Jones Industrial Average.
Other reasons to like CVX stock include OPEC raising oil production to 500,000 barrels per day and an expected increase in energy demand as people around the world get vaccinated against Covid-19 and economies open fully for business.
While 2020 was a difficult year for Chevron, the company appears to have weathered the storm and can look forward to a brighter future. Most importantly for investors, Chevron has reaffirmed its commitment to paying out its dividend.
Dividend Yield: 5.07%
The stock of technology and consulting company International Business Machines Corp., aka IBM, has been a a bit of a chronic under-performer. The company’s share price was above $200 back in 2013 and has traded below that level ever since. Today, IBM stock is worth $126.14 a share, about 20% below its level at the start of 2020.
While the stock has rebounded from its March lows, it remains well below its 52-week high of $158.75 a share. There’s reason to believe the stock can move higher in 2021. And while investors wait for the shares to breakout, they can comfort themselves with IBM’s 5.07% dividend yield, which is among the highest in the Dow Jones index.
Many analysts and pundits are encouraging investors not to throw in the towel on IBM just yet. Bulls claim that the Armonk, New York-based company is likely to benefit from the move to work-from-home arrangements with its numerous software platforms and consulting services that are aimed at facilitating remote collaboration.
IBM is also a leading player in the cloud computing space due to its acquisition of Red Hat, and the company is a global leader in the fast growing artificial intelligence space. IBM stock should get carried higher with a broad upsurge in the U.S. economy and stock market.
Dividend Yield: 4.11%
Pharmaceutical manufacturer and retailer Walgreens has struggled more than most companies to recover from the Covid-19 pandemic. Today, WBA stock trades at $41.16 a share, the exact same level it was at when global markets crashed in March 2020.
While most stocks in the Dow Jones Industrial Average have managed to recover over the past nine months, Walgreens’ share price has remained depressed. It’s currently 31% below its 52-week high of $59.78 a share. On a positive note, it’s hard to be too down on a stock that pays a dividend yield of 4.11%.
Known as a dividend aristocrat, many observers feel that WBA stock is horribly undervalued at current levels and ripe for both an earnings beat and a share price rally. Optimists note that despite rising competition, Walgreens and CVS Health (NYSE:CVS) still control half (50%) of the retail prescription drug market. And, Walgreens is likely to get a boost in 2021 as a it helps to distribute vaccines against Covid-19 to the Americans across the country.
With a competitive edge, strong dividend and upside potential, Walgreens stock is a dog that still has some bite.
Dividend Yield: 4.34%
New York-based telecommunications giant Verizon has a stock price that can best be described as stagnant. VZ stock has basically bounced between $55 and $60 a share since 2016. The stale performance has caused many investors to sell the stock. Even famed buy-and-hold investor Warren Buffett has given up on Verizon’s stock.
The company’s share price has risen 18% from its March 2020 low, but at its current price of around $58 a share, it remains stuck in its usual trading range. A breakout above $60 is needed. Should that breakout happen, Verizon, which has a dividend yield of 4.27%, would be a true Dog of the Dow.
Yet despite being a Dow laggard, there’s hope that 2021 could finally be the year when VZ stock busts out, propelled higher by the expansion and adoption of 5G wireless. The company has largely bet its future on the roll out of 5G wireless. Verizon sank $14.2 billion into showing up its national 5G network in the first nine months of 2020 as it prepares for the widespread switch of smartphones, tablets, computers and other connected devices to 5G.
It also spent nearly $8 billion on dividend payouts during the same time frame, a move that has kept a few investors loyal.
Dividend Yield: 3.55%
3M’s stock price peaked at $258.63 a share in 2018. Since then it’s been all downhill for the Saint Paul, Minnesota-based consumer goods company that manufactures everything from Scotch tape to sticky notes.
The stock has not closed above $200 a share in nearly two years. Fortunately for investors, the company pays a dividend yield of 3.55% and many analysts say that is why 3M stock is one that investors should buy and hold onto for the long haul.
And while 2020 may have been a difficult year for 3M and its shareholders, there’s reason to be optimistic about the year ahead. As a cyclical industrial stock, 3M tends to rise and fall with the economy. As the economic recovery from the global pandemic gathers steam in the coming 12 months, so too should 3M’s business pick-up. Plus, the company remains heavily invested in the research and development of new and innovative products. It surely is only a matter of time before 3M comes up with the next sticky note.
In the meantime, investors can take comfort in the fact that MMM stock’s dividend has been raised for 62 consecutive years. That shows a true commitment to creating value for shareholders.
Cisco Systems (CSCO)
Dividend Yield: 3.19%
Cisco Systems is another Silicon Valley stalwart whose share price has been spinning its wheels for many years now. In July 2019, CSCO stock hit a peak of $57.95 a share. Since then, the share price has sputtered in fits and starts. As of Jan. 5, Cisco shares trade at $43.98 a share, making them another disappointment of the Dow. The stock is currently 12% below its 52-week high. Given the lackluster performance of the telecommunication company’s stock, it’s a good thing that Cisco shares pay a dividend yield of 3.19%.
Bullish analysts like to point out that CSCO stock is currently cheap at just 14 times adjusted earnings. The company should see an upturn as the economy recovers, businesses start spending again, and 5G adoption ramps up. Long suffering-shareholders could be rewarded when spending on information technology (IT) returns in earnest in the second half of 2021.
After all, Cisco does enjoy a market leadership position in most categories in which it competes. A push into video conferencing and cybersecurity should also help lift the share price moving forward.
Dividend Yield: 3.27%
At this point, investors buy KO stock almost exclusively for its 3.27% dividend yield. After all, the product and the company that makes it have remained exactly the same since 1892. With the exception of a few tweaks here and there, Coca-Cola is the same sugary carbonated beverage that it was more than 100 years ago.
People who like Coca-Cola and its stock like it a lot. And a big part of what they like is the consistent and reliable dividend. The company’s biggest and most famous shareholder, Warren Buffett, has owned 400 million shares since the late 1980s and earns more than $500 million a year in dividend payments from the Atlanta, Georgia-based company.
In terms of the performance of KO stock, it has been struggling to regain its pre-pandemic level of $60 a share, currently trading at $52.18. The company’s performance has been hurt by the pandemic and economic downturn as its product has not been sold in movie theatres, sports stadiums and other entertainment venues for nearly a year now. Things should improve as Covid-19 recedes and people are again able to gather in crowds. But strong stock price appreciation isn’t the main reason people buy and hold Coca-Cola stock long-term. Again, it comes back to the dividend.
On the date of publication, Joel Baglole did not have (either directly or indirectly) any positions in the securities mentioned in this article.