The Dogs of the Dow 2019: 10 Dividend Stocks to Watch

This article was written with Ken Berman, founder of Gorilla Trades. It was part of a series of articles developed under an agreement with Kiplinger negotiated by me to designate Mr. Berman as a contributor and to deliver original articles for them on a regular basis.

The “Dogs of the Dow” is a simple but successful value investing strategy that many on Wall Street swear by. It’s easy: At the beginning of the year, buy the 10 highest-yielding dividend stocks in the Dow Jones Industrial Average. Hold them for a year. Next year, rinse and repeat.

While this does result in higher-than-average income, the investment case really is a value one. The idea: A high dividend yield – in the kind of rock-solid blue-chip stocks the Dow tends to hold – implies that shares are oversold. Meanwhile, the continued payment of dividends shows that management remains confident in the company’s earnings. Investors thus should profit both from an above-average yield, as well as an eventual recovery in share prices once Wall Street realizes its selling has gone too far.

How well does the strategy work? In 2018, the Dogs of the Dow lost just 1.5% on average versus a 5.6% decline for the Dow and a 6.2% drop for the Standard & Poor’s 500-stock index. The win marked the Dogs’ fourth consecutive year of outperformance. And already in 2019, some Dogs are baring their fangs.

Here are the 10 dividend stocks that make up the Dogs of the Dow, listed in order of their dividend yields as of the start of 2019. We also list their current yields, which have shifted a bit in the first few days of this year’s trading.

(1/10) Merck & Co.

  • Market value: $197.1 billion
  • Dividend yield (as of Jan. 1): 2.9%
  • Current yield: 2.9%
  • Merck (MRK, $75.60) didn’t get to be in the Dogs by underperforming in 2018 – its roughly 36% surge last year suggests that health care continues to be an important sector. The company’s Keytruda – a cancer treatment that has proven to reduce the risk of death when used with chemotherapy – has been vital to the company’s success. Keytruda sales doubled to $5 billion during the first three quarters of 2018, and revenues from the drug are projected to top $10 billion within a few years.

With other important treatments – such as Januvia, which helps people manage their type 2 diabetes – still selling well, Merck can keep generating the kind of cash flow it takes to invest in its business and fund its 2.9% dividend.

(2/10) Cisco Systems

  • Market value: $203.0 billion
  • Dividend yield (as of Jan. 1): 3.1%
  • Current yield: 3.0%
  • Cisco Systems (CSCO, $44.21) manufactures networking hardware and other communications products and services, and sports a budding cybersecurity business.

Cisco is another cash-flow machine. The company generated $13.7 billion in operating cash flow in the fiscal year ended July 28, 2018, and it wasn’t shy about funneling that cash (and more) to investors. Cisco doled out $6 billion in dividends and another $17.7 billion in share repurchases, albeit the high stock-buyback figure was helped out by repatriated cash as part of the massive corporate-tax overhaul passed at the end of 2017.

Cisco pays out $1.32 per share in annual dividends, yet earnings are expected to reach $3.04 per share in the current fiscal year. That’s a payout ratio of just 43%, meaning Cisco has plenty of room to sustain and grow its dividend. CSCO’s dividend has improved each year since 2012.

(3/10) Procter & Gamble

  • Market value: $228.6 billion
  • Dividend yield (as of Jan. 1): 3.1%
  • Current yield: 3.2%
  • Procter & Gamble (PG, $90.64) – the company behind billion-dollar brands such as Pampers, Crest and Tide – is actually trading relatively close to its all-time highs. Most Dogs of the Dow earn their admission into the club through precipitous declines in their stock price. But like Merck, P&G is a Dog this year simply because it makes a lot of money and distributes it to shareholders in the form of a healthy dividend.

P&G was the target of a sustained campaign in 2017 by activist investor Nelson Peltz, who claimed the company’s management structure was contributing to lackluster share performance. Peltz, who ultimately was admitted to the Procter & Gamble board in March 2018, may be having an impact. PG provided a bit of refuge to investors in 2018 by notching a market-beating 1.4% gain on top of a 3.1% dividend.

Procter & Gamble is a Dividend Aristocrat – a title bestowed upon S&P 500 companies that have raised their dividends each year for at least 25 years or more. Even better, at 63 consecutive years of dividend growth, P&G is elite company – only a handful of Aristocrats have improved their payouts for a half-century or more.

Its consumer-staples products offer decent margins and repeat purchases that fuel the consistent profits necessary to pay out those steady, and steadily growing, dividends. That said, PG has worked on paring back its product line to focus on its strongest brands, which is starting to have a positive effect on organic growth. This, paired with an aggressive share repurchase program, could make Procter & Gamble a lucrative Dog in 2019.

(4/10) JPMorgan Chase

  • Market value: $342.5 billion
  • Dividend yield (as of Jan. 1): 3.3%
  • Current yield: 3.1%

Investors seeking yield and dividend growth won’t often find both in the financial sector, but JPMorgan Chase (JPM, $102.92) is an exception. The company juiced its payout by 43% in 2018 to 80 cents per share, helping keep aloft a now 3%-plus yield.

While Federal Reserve interest-rate increases seem to give the stock market conniptions, investors should understand that they’re often a positive for banks such as JPMorgan Chase. For one, it means the interest rates they charge on loans can go up while the cost of funds that come from deposits barely budge. JPMorgan, as one of the country’s largest lenders, is poised to benefit. The Fed has signaled that the pace of interest-rate hikes will likely slow in 2019, but Wall Street still expects a couple of bumps before the year is through.

The mega-bank also has plenty more room to raise its dividend. Despite its massive payout increase earlier this year, JPM’s payout ratio (how much of its profits it pays out in dividends) is just roughly 30%.

JPMorgan did post its first earnings miss in 15 quarters just a few days ago – though this was largely blamed on Q4 2018’s downward pressure on trading results, as well as CEO Jamie Dimon not properly managing expectations. The company still posted a fourth-quarter record $7.1 billion in profits.

(5/10) Coca-Cola

  • Market value: $202.9 billion
  • Dividend yield (as of Jan. 1): 3.3%
  • Current yield: 3.3%
  • Coca-Cola (KO, $47.06) is a long-beloved blue chip that admittedly has been pinched over the past decade as consumers switch to healthier alternatives to sugar-laden beverages. To revive growth, Coca-Cola for years has moved further into coffee, juices, water and tea, and its M&A continued in 2018.

Last August, Coca-Cola announced it would spend $5 billion to acquire U.K.-based coffee company Costa. Coke also has a distribution agreement with and is one-sixth owner of Monster Beverage (MNST), but it also is working on its own energy drinks.

In a further example of its strategic shift, management has sold its bottling operations to franchisees and is focusing on smaller package sizes – measures likely to reduce costs and increase margins – and also is emphasizing low-calorie beverages.

An important benefit to owning Coca-Cola is management’s emphasis on payout increases. Coke is another Dividend Aristocrat – one that has paid a dividend every year since 1920 and increased that quarterly dole for 55 consecutive years.

This isn’t a particularly attractive time for soda companies. But as investors wait for Coke’s strategic initiatives to take hold, investors can be reasonably assured that it will deliver on its dividend.

(6/10) Pfizer

  • Market value: $245.3 billion
  • Dividend yield (as of Jan. 1): 3.3%
  • Current yield: 3.4%
  • Pfizer (PFE, $42.47) is doing a little housecleaning of late.

In July, the pharmaceutical giant said it will create three divisions – one for established medicines, one for innovative medicines and a third for consumer health care products. And in late December, Pfizer entered into a joint venture with GlaxoSmithKline (GSK) to combine their consumer healthcare units. GSK plans to eventually spin off the JV as an independent company; Pfizer will become a pure-play pharmaceutical company, leveraging the growth in that industry.

There’s still much that needs to play out. While investors wait, PFE is paying well more than 3% in dividends, offering a buffer against market volatility. That yield reflects a roughly 6% hike to its payout announced in December 2018 – Pfizer’s ninth consecutive annual dividend increase.

(7/10) Chevron

  • Market value: $218.1 billion
  • Dividend yield (as of Jan. 1): 4.1%
  • Current yield: 4.0%
  • Chevron (CVX, $111.96) is one of the largest integrated energy companies in the world. Its exploration arm alone operates across the globe, from America’s Gulf of Mexico to Africa, Australia and Argentina.

The stock started 2018 strong but weakened amid the decline in both oil prices and the overall markets. Shares dropped more than 20% between the early October highs and Christmas Eve lows.

Despite its fortunes being tied to a commodity (and a volatile one at that), CVX has been a persistent dividend grower and has remained committed to keeping that reputation. Chevron has improved its payout for 31 consecutive years, despite some uncertainty over the past few years about whether it would keep hiking its dividend. Since 2000, CVX has grown its dividend at an average annual rate of a little more than 7%.

It’s also worth noting that since 2000, Chevron’s shares have delivered an average annual total return of about 12% – more than twice the 5%-plus total return from the S&P 500 during the same time frame. That’s a whole lot of alpha. Just note the use of the word “average” – a look at CVX’s stock chart shows plenty of volatility between then and now.

(8/10) Verizon

  • Market value: $235.9 billion
  • Dividend yield (as of Jan. 1): 4.3%
  • Current yield: 4.2%

For investors seeking a technology-facing company with a high dividend, look no further than Verizon (VZ, $56.83). The telecom firm has increased its dividend for 12 straight years and offers a generous 4.2% dividend yield – more than twice the S&P 500 index.

Verizon has been investing to position itself for the next advancement in telecommunications: 5G wireless technology. This is vital because 5G is the next critical step in enabling mobile devices and the Internet of Things to fully deliver on their potential. And despite having to deal with rival AT&T (T) and lower-cost providers such as Sprint (S) and T-Mobile (TMUS), it has been able to grow its wireless business, announcing recently that it added a net 650,000 new postpaid phone connections during Q4 2018. This is a neat trick since most of the large carriers must deal with “churn” – the loss of customers to competition because of promotions or (as we’ve all surely experienced) poor customer service.

The growth offered by 5G combined with the cash flow and resulting dividend from its traditional businesses makes VZ an attractive play.

(9/10) Exxon Mobil

  • Market value: $307.1 billion
  • Dividend yield (as of Jan. 1): 4.8%
  • Current yield: 4.6%
  • Exxon Mobil (XOM, $72.13) is among the world’s largest integrated energy companies. And its current dividend yield of 4.6% is at historically high levels, suggesting that investors have oversold the shares in response to Q4 2018’s big decline in oil prices.

XOM shares look cheap, but more importantly, the company looks solid. The company’s long-term debt-to-capital ratio is just 10%, putting the company in fine position to weather commodity-price swings. Further, its diverse businesses include upstream (oil drilling) and downstream (refineries and gas stations) and everything in between – refining and retail can actually help lessen the negative impact of weak oil and natural gas prices.

Exxon is structured to endure tough times in the oil patch, but also thrive should prices significantly rebound. Also important is that XOM has raised its payout for 36 consecutive years. While many of its competitors were merely maintaining (or even reducing) their dividends during the 2014 bear market in oil, Exxon continued to up the ante – and should continue to do so for more years to come.

(10/10) International Business Machines

  • Market value: $113.2 billion
  • Dividend yield (as of Jan. 1): 5.5%
  • Current yield: 5.1%
  • International Business Machines (IBM, $122.19) was roughed up by about 26% in 2018, driving the yield on its shares to well north of 5%. That’s attractive, but investors would do well to remember that these 10 stocks are called the Dogs of the Dow, not the princes or the pearls. Some of them might have considerable flaws that at least need to be weighed before buying.

For instance, after years of shrinking revenues as it sold off business lines, IBM in the fourth quarter of 2018 announced the acquisition of Red Hat (RHT), which provides open-source software solutions for large enterprises. The deal, which IBM said it expects to close in the second half of 2019, would add as much as $25 billion in debt and has made some investors nervous – in part because of the dear price it paid (55 times expected 2018 earnings).

But IBM might have been sold off too hard in 2018, and its fat 5%-plus yield and cheap price (8.7 times 2019 earnings estimates as of the start of the year) might have been too much for investors to ignore. Midway through January, IBM has already put up a 7.5% gain.

Click here to see the article on Kiplinger.

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