Breakout 2: 4 Dow Dogs To Hold Forever (And Some To Write Off)

Foreword

While more than half the collection of Dow Industrials is too pricey and reveals only skinny dividends, the 10 lowest priced Dogs of the Dow are worth a look. This month four of the ten even live up to the ideal of having their annual dividends from a $1K investment exceed the single share price. Many more show prices within $10 of meeting that goal.

With renewed downside market pressure, it may be possible for (CVX, VZ, KO, RTX, MRK, XOM, and CSCO) to join the elite lowest-priced, high-yield Dow stocks – DOW, XOM, WBA, and PFE – four ideal dogs, and become fair-priced again with their annual yield (from $1K invested) meeting or exceeding their single share prices by year’s end.

After the Ides of March dip, and others yet to come, the time to buy the top yield Dow dogs continues to be at hand.

Actionable Conclusions (1-10): Brokers Targeted 15.58% To 35.34% Net Gains From Top Ten Dow Dogs By June 2021

Four of ten top dividend-yielding Dow dogs were verified as also being among the top ten gainers for the coming year based on analyst one-year target prices. (They are tinted gray in the chart below). So, our June 2020 yield-based forecast for Dow dogs, as graded by Wall St. wizards, was 40% accurate.

Estimates based on dividend returns from $1,000 invested in the 10 highest-yielding stocks and their aggregate one-year analyst median target prices, as reported by YCharts, created the 2020-21 data points. Note: One-year target prices by single analysts were not applied. Ten probable profit-generating trades projected to May 20, 2021 were:

Source: YCharts.com

Raytheon Technologies Corp. was projected to net $353.35, based on dividends, plus the median of target prices estimated by twenty-two analysts, less broker fees. The Beta number showed this estimate subject to risk/volatility 33% over the market as a whole.

Boeing Co. (BA) netted $285.38 based on the median of target price estimates from twenty-three analysts, less broker fees. The Beta number showed this estimate subject to risk/volatility 45% greater than the market as a whole.

The Travelers Co. (TRV) was projected to net $237.66, based on dividends, plus the median of target price estimates from twenty-two analysts, less broker fees. The Beta number showed this estimate subject to risk/volatility 12% under the market as a whole.

Merck & Co. Inc. was projected to net $236.42, based on the median of target estimates from twenty analysts, plus dividends, less broker fees. The Beta number showed this estimate subject to risk/volatility 50% less than the market as a whole.

Walgreens Boots Alliance was projected to net $201.52, based on the median of target price estimates from twenty-three analysts, plus dividends, less broker fees. The Beta number showed this estimate subject to risk/volatility 44% under the market as a whole.

Goldman Sachs Group, Inc. (NYSE:GS) was projected to net $193.20, based on the median of target price estimates from twenty-six analysts, plus annual dividend, less broker fees. The Beta number showed this estimate subject to risk/volatility 45% more than the market as a whole.

JPMorgan Chase & Co (JPM) was forecast to net $188.93, based on the median of target price estimates from twenty-six analysts, plus annual dividend, less broker fees. The Beta number showed this estimate subject to risk/volatility 20% above the market as a whole.

Pfizer Inc. was projected to net $167.79, based on dividends, plus the median target price estimates from seventeen analysts, less broker fees. The Beta number showed this estimate subject to risk/volatility 28% less than the market as a whole.

Procter & Gamble Co. (PG) was projected to net $161.97, based on the median of target price estimates from twenty-three analysts, plus the estimated annual dividend, less broker fees. The Beta number showed this estimate subject to risk/volatility 56% less than the market as a whole.

Verizon Communications was projected to net $155.83, based on dividends, plus the median of target price estimates from twenty-nine analysts, less broker fees. The Beta number showed this estimate subject to risk/volatility 56% less than the market as a whole.

The average net gain in dividend and price was estimated at 21.82% on $10k invested as $1k in each of these top ten Dow Index stocks. This gain estimate was subject to average risk/volatility equal to market as a whole.

Source: wolvesofinvesting.com

The Dividend Dogs Rule

Stocks earned the “dog” moniker by exhibiting three traits: (1) paying reliable, repeating dividends, (2) their prices fell to where (3) yield (dividend/price) grew higher than their peers. Thus, the highest yielding stocks in any collection became known as “dogs.” More precisely, these are in fact best called “underdogs”.

The May 20, 2020, Dow 30 By Yield

Source: YCharts.com and indexArb.com

Actionable Conclusions (11-20): 10 Top Dow Dividend Stocks By Yield Ranged 4.03% To 8.79% Per YCharts And 4.12% To 8.64% Per IndexArb

Top ten Dow dogs as of 5/20/20 by YCharts represented seven and IndexArb represented eight of eleven Morningstar sectors. Both listed nine stocks in dissimilar order and disagreed about their tenth place choices.

Top yielding lone basic materials stock, Dow Inc. [1] and two energy stocks, Exxon Mobil Corp [2] and Chevron Corp [3] were the first three of the top ten on both lists.

Fourth place on both the YCharts and IndexArb lists went to the top technology firm, International Business Machines Corp (IBM) [4]. Fifth place on both lists was filled by agreement by the top of two healthcare representatives, Walgreens Boots Alliance [5].

There was also total agreement on the sixth place holder, the communication services representative, Verizon Communications [6]. The second healthcare representative placed seventh on YCharts an eighth on IndexArb; that was Pfizer Inc. [7] [8]. Then the lone financial services member placed eighth on YCharts and seventh on IndexArb, JPMorgan Chase & Co [8] [7].

There was no disagreement about the ninth place holder. Both YCharts and IndexArb agreed on one industrials index representative on both lists, 3M Company (MMM) [9].

However, the tenth slot showed a different representative by name and sector on each list. For YCharts it was the consumer defensive stalwart, Coca-Cola [10]. Then for indexArb it was another industrials for that slot, Caterpillar (CAT) [10] to complete their May 20 top ten lists of dogs of the Dow by yield.

Source: YCharts.com and indexArb.com

Dividend Vs. Price Results

Graphs above show the relative strengths of the top 10 Dow dogs by yield as of market close 5/20/2020. The two sets of charts show the variation of dividends calculated by YCharts.com estimates and those from the arbitrage firm IndexArb.com.

Again this month six of the top ten Dow dogs show an overbought condition (in which aggregate single share price of the 10 exceeds projected annual dividend from $10k invested as $1k each in those 10). The dividend dogcatcher priority is to select stocks whose dividends from $1K invested exceed their single share price. In the Dow 30 Index, four of top ten now meet that goal – Dow; Exxon Mobil; Walgreens Boots Alliance; and Pfizer – and are dogcatcher certified as buys to hold forever this month.

Actionable Conclusion (21): Dow Dogs Still Overbought

The aggregate single share price vs. dividend yield for the top 10 Dow dogs was 58% per YCharts and 60% per IndexArb, while the dividend derived from $10k invested as $1k in each of the 10 was 43% for YCharts and 40% for IndexArb. In past months, IndexArb dividend projection was always the higher of the two. In March, April, and May, however, the market caught up and passed the IndexArb forecasters for higher yields and lower prices. As of May 20 that was due to the more expensive Caterpillar stock on the IndexArb list filling in for the less expensive Coca-Cola stock on the YCharts edition.

This gap between high share price and low dividend per $1k (or oversold condition) means no matter which chart you read, 26 of these 30 are low risk and low opportunity Dow dogs. The Dow top 10 average price per dollar of annual dividend for May 20, 2020, was $20.49 per YCharts or $20.60 in the IndexArb reckoning.

One that cut its dividend in March, Boeing, needs to re-learn how to fly and has to get way down before it can get airborne again. BA may be in worse shape than was GE (NYSE:GE) when booted off the Dow index.

Bear in mind that this dogcatcher yield based stock picking strategy is contrarian. That means rooting for (buying) the underdog is productive when you don’t already own these stocks. If you do hold these stocks, then you must look for an opportune times to add to your position to best improve your dividend yield.

Price Drops or Dividend Increases of 2.5% to 45% Could Get All 10 Dow Dogs Back to “Fair Price” Rates For Investors

Source: YCharts.com

The charts above retain the current dividend amount and adjust share price to produce a yield (from $1K invested) to equal or exceed the single share price of each stock. As you can see, Dow, Exxon, Walgreens, and Pfizer are at or well under the goal of closing the gap between share price and dividend from $1k invested.

This illustration shows that four low priced stocks (CVX, VZ, KO, and JPM) need to trim down prices between six and thirty-one dollars. Then two behemoth priced stocks hold the key to realizing the 50/50 goal for share prices equaling dividend payouts from $10k invested. If IBM and 3M could shed just forty-two and seventy-five dollars each in share price, the top 10 as a group could attain that elusive 50/50 goal.

Source: YCharts.com

Actionable Conclusions: (22-31) Dow Index Showed 13.4% To 33.4% Top 10 Upsides To May 20, 2021; (32) One 1.98% Downside Showed By Broker 1 Yr. Targets

To quantify top dog rankings, analyst median price target estimates provide a “market sentiment” gauge of upside potential. Added to the simple high-yield “dog” metrics, analyst median price target estimates provided another tool to dig out bargains.

Analysts Forecast A 7.7% Advantage For Five Highest-Yield, Lowest-Priced of 10 Dow Dogs As Of May 20, 2021

Ten top Dow dogs were culled by yield for their monthly update. Yield (dividend/price) results as verified by YCharts did the ranking.

Source: YCharts.com

As noted above, top 10 Dow dogs selected 5/20/20 revealing the highest yield dividend yields represented nine or eight of the eleven sectors in YCharts and IndexArb reckonings.

Actionable Conclusions: Analysts Expected Five Lowest-Priced of the Ten Highest-Yield Dow Dogs (33) To Deliver 14.75% Vs. (34) 13.69% Net Gains by All Ten Come May 20, 2021

Source: YCharts.com

$5,000 invested as $1k in each of the five lowest-priced stocks in the top ten Dow Dividend kennel by yield were predicted by analyst one-year targets to deliver 7.7% more gain than from $5,000 invested in all ten. The third lowest priced, Walgreens Boots Alliance, was projected to deliver the best net gains of 20.15%.

Source: YCharts.com

The five lowest-priced Dow top-yield dogs for May 20 were Dow, Pfizer, Walgreens Boots Alliance, Exxon Mobil, and Coca-Cola, with prices ranging from $36.18 to $45.89.

Five higher-priced Dow top-yield dogs for May 20 were Verizon Communications, JPMorgan Chase, Chevron, International Business Machines, and 3M, whose prices ranged from $54.26 to $149.68.

The distinction between five low-priced dividend dogs and the general field of ten reflected Michael B. O’Higgins’ “basic method” for beating the Dow. The scale of projected gains based on analyst targets added a unique element of “market sentiment” gauging upside potential. It provided a here-and-now equivalent of waiting a year to find out what might happen in the market.

Caution is advised since analysts are historically only 20% to 80% accurate on the direction of change and just 0% to 20% accurate on the degree of change. (In 2017 the market somewhat followed analyst sentiment. In 2018 analyst estimates were contrarian indicators of market performance, and they continued to be contrary for the first two quarters of 2019 but switched to conforming for the last two quarters). In 2020 analyst projections so far have been very contrarian.

Afterword

Lest there be any doubt about the recommendations in this article, below is the list four May 20 stocks showing dividends for $1k invested exceeding their single share prices:

Dow, Exxon, Walgreens, and Pfizer are at or well under the goal of closing the gap between share price and dividend from $1k invested.

The dogcatcher hands off recommendation refers to one that cut its dividend in March, Boeing, needs to re-learn how to fly and has to get way down before it can get airborne again. BA may be in worse shape than was GE when booted off the Dow index.

The net gain/loss estimates above did not factor in any foreign or domestic tax problems resulting from distributions. Consult your tax advisor regarding the source and consequences of “dividends” from any investment.

Stocks listed above were suggested only as possible reference points for your Dow dividend dog stock purchase or sale research process. These were not recommendations.

Disclosure: I am/we are long CSCO, INTC, PFE. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Disclaimer: This article is for informational and educational purposes only and should not be construed to constitute investment advice. Nothing contained herein shall constitute a solicitation, recommendation or endorsement to buy or sell any security. Prices and returns on equities in this article except as noted are listed without consideration of fees, commissions, taxes, penalties, or interest payable due to purchasing, holding, or selling same.

Graphs and charts were compiled by Rydlun & Co., LLC from data derived from Indexarb; YCharts; finance.yahoo.com; analyst mean target price by YCharts. Dogs photo: wolvesofinvesting.com.