A new battle with inflation has thrown Dow stocks into a bear market. At last week’s low, the Dow Jones Industrial Index was down 19.8% from its January peak – close enough to trigger the bear market alarm bells for all but the strictest of market watchers.
Besides, all other indexes have already sunk deep into bear country. With a volatile and treacherous environment now upon us, it’s worth asking which are the best Dow stocks to buy?
Of course, the answer depends on what you’re looking for, so let’s outline a few characteristics that position a stock to outperform in a bear market.
First, it helps if the company has a business model that is less economically sensitive. Bears usually arrive when something ominous threatens the economy and public companies’ earning potential. Second, a history of lower volatility helps buffer your emotions when catastrophe laces the headlines and manic moves buffet your portfolio. Third, a reliable market-beating dividend can help incentivize you to stay the course.
With those three metrics as our measuring stick, three Dow stocks stood above the rest.
Dow Stocks: Verizon (VZ)
Verizon (NYSE:VZ) checks all three boxes. Cell phones and the services needed to run them have become as necessary as heat, food and shelter. Ask a teenager, and they’ll argue they’re even more essential. That translates into a reliable income stream for Verizon regardless of the economic climate. As for lower volatility to reduce your propensity to panic, VZ stock carries a beta of 0.41, so you’re only experiencing about 40% of the daily movement of the S&P 500.
Finally, VZ offers the highest dividend yield of all 30 Dow components at 5%. The juicy cash payments will continue to reward you every quarter while waiting for an eventual recovery in asset prices.
Verizon has participated in the downturn this year and trades 19% off its highs. The discount has driven the telecom titan to a lowly P/E ratio of 10, so the valuation is compelling.
Outperformance during a downturn is perhaps the most compelling reason to buy a particular Dow stock. The ultimate form of flexing on the Street is being able to continue climbing or at least not fall when everything else is cratering.
For 2022, Merck (NYSE:MRK) has been the second-largest gainer in the Dow. But it only missed the top spot by a slim margin (25% vs. 22%)! Besides, the best performer, Chevron (NYSE:CVX), had a massive advantage that Merck lacked – namely, booming oil prices. Yet MRK stock nearly kept pace.
But it’s not just the relative strength that should draw your attention. MRK stock also carries the lowest beta of all 30 stocks at 0.36. This year’s gains haven’t required you to stomach gutwrenching volatility. They’ve come on the back of far lower volatility than the rest of the market.
At the same time, even after this year’s price surge, Merck still pays a dividend of 3%.
Dow Stocks: McDonald’s (MCD)
McDonald’s (NYSE:MCD) ties up today’s top Dow Stocks pitch with a similar story to its predecessors. Its 2.24% dividend yield isn’t as super-sized as Verizon’s, but it’s certainly tastier than the 1.63% available in the S&P 500. At the same time, it still qualifies as one of the less volatile stocks in the Dow, with a beta of 0.57.
But perhaps the most compelling argument for the double arches is its history of outperformance. The long-term chart reveals substantial strength through every downturn of the past 20 years. MCD stock barely budged in 2008 while nearly everything else melted down. The other bearish episodes along the way have seen it recover swiftly.
This year, McDonald’s made its bear market low early in March, and we’ve seen higher pivot lows since. I think the relative strength bodes well moving forward.