If you’re looking to build a portfolio of high-quality blue chip stocks, Dow stocks should be at or near the top of your list. These stocks, aka the components of the Dow Jones Industrial Average (or DJIA), represent 30 of America’s largest, most venerable companies, across multiple sectors. There are a total of 30 Dow components, but instead of buying the whole bunch, you may want to focus on what could be some of the strongest individual opportunities within the index.
While few stocks that make up the DJIA can be classified as overvalued, there are few names that sport more-than-reasonable valuations at current prices. These names, all arguably oversold as of late, make for great long-term stocks to buy on the dip.
Although in the near-term they may continue to trade sideways, or even move slightly lower, between the strength of their underlying businesses, plus a track record of dividends and dividend growth, each of these Dow stocks to buy could produce steady long-term returns for your portfolio.
American Express (AXP)
American Express (NYSE:AXP) is a blue chip stock that needs little introduction. The financial services firm, best known for its charge and credit card products, has long been regarded as a high-quality stock, representing ownership in a business with a deep competitive moat.
In recent months, however, investors have turned bearish on AXP stock. This sell-off in financial stocks due to the banking crisis has played a role, but a negative reaction to the company’s latest earnings report has also been a big factor. However, current sentiment for AXP works in the favor of long-term investors.
Once concerns about the potential fallout from the current economic slowdown pass, shares could start bouncing back to past highs. Alongside appreciation potential, this stock (trading for a more-than-fair 15.6 times earnings) pays a dividend of 1.62%, and AXP’s rate of payout has tripled over the past decade.
Earlier this month, I called Caterpillar (NYSE:CAT) one of the best dividend stocks to buy. However, it’s not only “dividend aristocrat” status and a 2.32% dividend yield that make shares in this construction and mining equipment maker a buy.
CAT’s post-earnings slide since April makes it one of the best Dow stocks to buy on the dip. Not only has this pullback resulted in CAT stock now sporting an even higher forward yield. Shares have also fallen to a valuation of around 15.3 times earnings.
Sure, on the surface that may sound pricey, or at best, a fair-price for CAT. Even so, keep in mind that sell-side forecasts call for earnings per share to rise from $12.64 in 2022, to over $20 per share by 2025. This earnings may enable Caterpillar to sustain, and add to, its current valuation over the next few years.
Walt Disney (DIS)
Walt Disney (NYSE:DIS) is another one of the Dow stocks hit hard this latest earnings season. For the preceding quarter, the media conglomerate reported year-over-year revenue growth of 13%, and a big rebound in non-GAAP earnings.
However, investors were not pleased to hear about falling subscriber numbers for the company’s Disney+ streaming platform. This news has sent DIS stock around 10% lower since the earnings release on May 10. Nevertheless, this post-earnings weakness may make it one of the stocks to buy on the dip.
As a Seeking Alpha commentator recently argued, “short-term pain” could pave the way for “long-term gain.” Why? This unexpected drop in subscribers is far outweighed by higher subscription fees and reduced operating costs. Analysts forecast that Disney’s turnaround could push annual earnings to $6.58 per share by 2025. Not too shabby, given you buy DIS today for $91 per share.
Johnson & Johnson (JNJ)
Johnson & Johnson (NYSE:JNJ) is the epitome of blue chip stock. Operating in a resilient sector (healthcare), the company has a long track record of profitability and dividend growth. JNJ has raised its rate of payout 60 years in a row, making it one of the top “dividend kings.”
Despite these strengths, JNJ stock has delivered a more mixed performance recently. Earlier this year, concerns about the company’s talcum powder cancer lawsuits resulted in an extended slide for shares. In April, the stock bolted higher upon news of an $8.9 billion settlement of these claims.
However, bullishness about the settlement, as well as about its planned spinoff of Kenvue (NYSE:KVUE) has waned. Yet while frustrating for existing investors, recent short-term hiccups enable new investors to scoop up JNJ at an attractive entry point. The stock trades for just 15 times earnings, and sports a nearly 3% dividend yield.
JP Morgan (JPM)
Plenty of analysts and commentators have stated that JP Morgan (NYSE:JPM) will emerge as a “winner” (for lack of a better word) as a result of this year’s banking crisis. Back in April, I dove into the hype and facts surrounding this argument.
My conclusion? While conceding that this big bank faces some of the same risks that caused numerous regional banks to fail (unrealized loan losses), explaining its pullback due to the crisis, I argued that JPM stock was trading at a historically-low valuation.
Flash forward to now. JPM still trades below pre-crisis price levels. Yet while the bank doesn’t appear set to further capitalize on the crisis, a big rebound may be in store, once this crisis, plus other headwinds (such as with commercial real estate loans) clear up. While waiting for a comeback to take shape, you can receive a steady return, via JPM’s 3% dividend.
UnitedHealth Group (UNH)
If capital compounding is one of your investment objectives, UnitedHealth Group (NYSE:UNH) is one of the best Dow stocks to buy. Shares in the healthcare company are up 678% over the past decade. Don’t get me wrong. I don’t think shares can rise by another 678% between now and 2033.
However, UNH stock could still deliver outsized returns. As I have discussed in past coverage of this stock, UNH’s fast-growing Optum care and prescription benefits unit could enable the company to continue delivering above-average earnings growth.
This more-than-justifies the stock’s current forward valuation of 19.2 times earnings. Better yet, instead of merely rising in tandem with increased earnings, UnitedHealth Group shares could benefit from multiple expansion. To top things off, UNH’s fast-growing dividend (which has grown by an average 17.1% annually over the past five years) may provide an additional boost to long-term total returns.
Walgreens Boots Alliance (WBA)
Walgreens Boots Alliance (NASDAQ:WBA) is one of the “Dogs of the Dow,” but many investors may also consider it one of the biggest dividend/value traps within the index. Shares in the pharmacy giant sport a 6.12% dividend yield.
This may seem enticing to income-focused investors, yet this high payout has been far outweighed by steady price declines for WBA stock in recent years. So then, why do I consider it one of the best Dow stocks to buy today?
Despite a lackluster performance since the late 2010s, a much-awaited recovery for the stock may be in store. Possibly in the early stages of a turnaround, if the company can continue to improve its fiscal performance, shares could be poised to make a big comeback. You can buy WBA today for just 7 times forward earnings, suggesting big upside in the event sentiment for the stock improves.
On the date of publication, Thomas Niel did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.