The start of the new year means a fresh chance for yield-seeking investors to get in on one of the easiest market strategies in the book:
The Dogs of the Dow.
Investment manager Michael B. O'Higgins popularized the idea in his 1991 book Beating the Dow. And it doesn't get much simpler: At the beginning of the year, buy the 10 highest-yielding Dow Jones Industrial Average components in equal amounts. Hold them until the end of the year. Rinse. Repeat.
While the Dogs of the Dow sounds like a dividend strategy, it has its roots in value. O'Higgins' proposed that firms with high dividends relative to their stock price in the index would be near the bottom of their business cycle and represent bargains compared to components with lower dividend yields.
And why the DJIA? The Dow Jones has long been considered one of the leading stock-market gauges of America's economy. While the S&P 500 has more components and is more diversified, the Dow still covers most sectors. Not to mention, its components are extremely liquid and there are reams of research available on all 30.
But buyer beware. While the Dogs of the Dow have posted a respectable 8.7% annual total return since 2000, the Dogs have trailed the DJIA in each of the past four years. Analysts have proposed that the shift to growth investing has hurt the strategy's performance; but with value stocks predicted to regain their mojo, the Dogs could again have their day.
Without further ado, here are the 2022 Dogs of the Dow.
Data is as of Dec. 31, 2021, the date on which the Dogs of the Dow are identified. Dividend yields are calculated by annualizing the most recent payout and dividing by the share price. Stocks listed in reverse order of yield.
1 of 10
Oh, how the tables have turned.
A decade ago, Intel (INTC, $51.50) was the leading name in chips, while Advanced Micro Devices (AMD) and Nvidia (NVDA) were promising yet still relatively minor players – combined, the two were worth less than a tenth of Intel by market capitalization.
But Nvidia is now several times Nvidia's size, and AMD isn't too far behind Intel's $210 billion market value. That's because in recent years, Intel has missed the boat on a variety of fronts. From mobile computing and productions capabilities for faster/smaller chipsets, Intel has stumbled … and its rivals have eaten its lunch.
But while Intel might be down, it's hardly not out.
Intel's Alder Lake 12th-generation core processor chips have started to eat away from AMD's high-end processors, and Intel recently announced the latest line of Alder Lake chips that include what the company says is "the fastest mobile processor. Ever." The next two years should see its 13th-gen (Raptor Lake) and 14th-gen (Meteor Lake) chips come live.
Intel also could squeeze some value out of Mobileye, the autonomous vehicle-chip stock that it acquired back in 2017. INTC in December announced its intent to spin the company off in an initial public offering (IPO) while maintaining controlling interest – allowing Intel to enjoy both an immediate windfall while still realizing gains as Mobileye grows.
In keeping with the Dogs of the Dow's value bent, Intel trades at just 14 times the coming year's earnings estimates, significantly less than both the S&P 500 (21) and technology sector (28). INTC's 2.7% yield is also much better than what you typically get out of tech shares.
2 of 10
In today's low-carb and keto-friendly world, sugary soft drinks and sodas are practically verboten. And in recent years, that has largely muted the returns of giant Coca-Cola (KO, $59.21), which has produced roughly half the total returns (price plus dividends) of the S&P 500 over the past half-decade.
But KO is doing a better job of ensuring it has the goods to shift with consumer tastes.
Coca-Cola has spent a few years moving its portfolio into healthier options. That includes teas, milk and sparkling water, among others. It also unveiled new zero-sugar versions of soda brands such as Sprite and Coca-Cola, which fueled about 25% of the Coca-Cola brand's growth in the third quarter.
KO is also looking toward athletics and fitness fanatics for growth. Back in November, Coca-Cola purchased sports beverage group BodyArmor – which it already had a 15% stake in – for $5.6 billion. This instantly gives it a meaningful presence in the industry. "BodyArmor is currently the #2 sports drink in the category in measured retail channels, growing at about 50% to drive more than $1.4 billion in retail sales," the company says.
And you don't get more dependable than Coca-Cola's dividend, which has been growing uninterrupted for 59 consecutive years. That easily puts it among the longest-tenured Dividend Aristocrats.
3 of 10
Unlike most of Wall Street, 3M (MMM, $177.63) was already getting crushed by the time the COVID bear market came around. The U.S.-China trade war and other difficulties were already weighing on the industrial name when COVID cramped demand for many of the company's products (except its N95 masks and filtering division, of course).
But 2022 could be another year of recovery for 3M.
3M makes more than 60,000 products, from consumer products such as sponges and packing tape to industrial diamond-coated grinding disks and orthodontic supplies. In normal times, this wide product portfolio provides insulation from specific shocks to its various businesses. And it allows 3M to enjoy in numerous facets of a broad economic recovery.
The company grew third-quarter revenues 7.1% year-over-year and generated more than $1.5 billion in free cash flow. 3M is benefiting from continued cost cutting and development programs, as well as from selling chronically underperforming business lines.
3M's forward P/E of 16 makes it one of the more expensive 2022 Dogs of the Dow, and yet it still trades for much cheaper than the S&P 500 and industrial sector (20) alike.
4 of 10
Patent expirations are a hurdle most pharmaceutical and biotechnology companies have to face, and that's no different for established biotech Amgen (AMGN, $224.97). Top drugs such as Enbrel, Neulasta and Otezla will fall off the patent cliff in coming years.
The good news? The earliest drug in that cohort to fall off patent won't do so until 2025. And often, U.S. drug manufacturers can kick the can down the road by making minor changes to drugs or adding more indications for the therapy. Not to mention, expirations go both ways – AbbVie's (ABBV) blockbuster drug Humira is set to lose patent protection in the U.S. in 2023, and Amgen has already gained approval to sell Amjevita, a biosimilar form of the drug.
Another big reason AMGN shareholders shouldn't panic is its potential-packed pipeline. The biotechnology firm has more than 20 drugs in Phase 2 or 3 trials. And recently, the FDA approved Amgen severe-asthma medication Tezspire, a potential blockbuster drug.
Nearer-term, another reason to like Amgen is its dividend. Namely, it'll be 10% bigger in 2022, at $1.94 per share quarterly, the company announced in December.
5 of 10
Merck (MRK, $76.64) has been doing a lot of evolving in recent years. It has gone on an impressive pipeline-buying spree, which continued in late November with its $11.5 billion buy of Acceleron. And Merck also recently spun off its legacy generic drug and off-patent medicines into a separate company, Organon (OGN).
The resulting Merck is one of the top growth-oriented drug producers in the world.
Sales of oncology blockbuster drug Keytruda jumped 22% year-over-year during Q3, to $4.5 billion. Some analysts believe Keytruda will soon be the world's best-selling drug, overtaking AbbVie's Humira. That's in part because Merck intends to seek approval for other indications of the drug. But Merck has other major drugs in the tank, including Gardasil, whose sales grew 68% to $2 billion in Q3. And its pipeline includes dozens of products in Phase 2 and 3 trials.
A low forward P/E of around 10, and a yield well above 3%, make MRK a model example of the income and value found in the Dogs of the Dow.
6 of 10
Walgreens Boots Alliance (WBA, $52.16) wasn't the COVID winner you might have thought. COVID prompted a shift in the company's sales mix to lower-margin items, and it dragged heavily on foot traffic in the company's Boots U.K. stores.
So, like many other retailers, an escape from the pandemic should help Walgreens, which used COVID as an opportunity to cut nearly $2 billion in costs from its operations.
Partnerships will be essential too. For instance, Walgreens has been opening branded primary-care clinics with VillageMD, who staffs these locations with physicians, allowing them to cater to more than ear infections and sniffles. Walgreens plans to open 1,000 of these clinics at its stores by 2027.
Also in play is the potential divestiture of its Boots business; several reports in December said Walgreens was mulling the move.
With foot traffic on the rebound and new avenues for growth opening up, WBA could be a productive Dow Dog. A forward P/E of around 10 doesn't hurt, either.
7 of 10
COVID was downright miserable for the energy sector – even integrated oil-and-gas giants such as Chevron (CVX, $117.35).
However, while numerous companies closed, and many more were forced to cut jobs, slash capital expenditures and pull back on their dividends, Chevron managed to keep its dividend running and even used an all-stock deal to acquire Noble Energy.
Chevron's acquisition of Noble at fire-sale prices boosted its overall presence in low-cost fields in the Permian Basin, allowing the company to better leverage a rebound in energy prices, which came in spades in 2021.
Energy stocks of all sorts went bananas in 2021, making it the S&P 500's top sector. Chevron returned 46% amid a complete rebound in its operations. For instance, its third quarter saw Chevron earn $6.1 billion versus the $207 million it lost in the year-ago quarter.
However, despite its massive 2021 move, CVX stock yet again finds itself among the Dogs of the Dow.
Chevron's 4.6% current yield isn't as generous as the 6% or so it offered at this same time last year, but it's still one of the top yields in the Dow. Meanwhile, it's value-priced at just 12 times earnings estimates.
8 of 10
International Business Machines (IBM, $133.66) has been nothing short of a disappointment in recent years.
Big Blue has struggled to remain relevant in the age of cloud computing while rivals chipped away market share. At one point, the firm recorded 22 consecutive quarters of declining revenue, then restarted that streak shortly after breaking it. Even including dividends, IBM shares returned just 1% between 2017 and 2021.
But IBM might finally be getting itself together.
Its 2019 purchases of open-source software firm Red Hat boosted the company's operations. Fast-forward to 2021, and the company cut loose some dead weight, spinning off its legacy IT infrastructure services as Kyndryl (KD).
A now leaner, meaner IBM is focused once again on growth.
We saw signs of this in the company's third quarter, where overall cloud revenues grew 14% year-over-year. It'll still be a while before IBM can report its post-separation numbers, but analysts are generally expecting IBM to start heading in the right direction once again.
Better still: IBM didn't give away any of the dividend game with Kyndryl. International Business Machines remains a Dividend Aristocrat whose 4.9% yield is among the best of 2022's Dogs of the Dow.
9 of 10
Verizon (VZ, $51.96) spent the last few years trying to build out a communications and media empire. Wireless communication has become a commodity; there isn’t much difference between carriers, plans or offerings at this point. The U.S. market is saturated. The major carriers can’t rely on their legacy businesses for growth.
But Verizon’s ventures, which included buying Yahoo! And other media properties, simply didn’t pan out. Several write-offs later, and VZ is just getting back to basics: improving its giant network and providing services that utilize said network.
The 5G transformation is a major tailwind for Verizon. It’s not just consumer devices; smart vehicles, the Internet of Things and other applications will be a big driver for its network. Also, Verizon has started to transition toward more enterprise customers, which includes fleet management software and applications to data security. These should also provide a runway for growth.
A forward P/E under 10 and a nearly 5% dividend, meanwhile, provide some of the best features of the Dogs of the Dow.
10 of 10
Dow has had a wild and transformative few years that saw it spin off assets before merging with rival DuPont (DD), then the chemical giant split into three separate firms. The remaining Dow contains the materials sciences chemicals, including adhesives, polyurethanes, silicones, resins and waxes, among others.
Like most other materials stocks, Dow struggled right alongside the broader economy during the COVID recession. For instance, during Q3 2020, the company lost 4 cents per share on $9.7 billion in sales. By Q3 2021, Dow had recovered considerably, posting $2.23 per share in earnings on $14.8 billion in revenues.
The omicron and future variants could throw more hurdles at the Dow recovery, but in general, a growing global economy should mean continued growth in demand for Dow's products.
You can buy into that recovery on the cheap through Dow. Shares trade at a svelte nine times future earnings and yield nearly 5% at today's prices. That's roughly four times the income you'll pull from the broader market, and at a much better valuation. A fair dividend payout ratio of 45% of earnings leaves Dow ample room to raise that payout further.
Aaron Levitt was long AMGN and MRK as of this writing.
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Dogs of the Dow 2022: 10 Dividend Stocks to Watch – Kiplinger's Personal Finance