This high-dividend investing strategy has worked for years.
Historically low interest rates have made blue-chip dividend stocks increasingly appealing for income investors in the past year. One conservative dividend investing strategy that has worked extremely well over the year is the “Dogs of the Dow” strategy. The extremely simple strategy involves buying the 10 highest-yielding stocks among the 30 components of the Dow Jones Industrial Average. It may seem extremely basic, but the Dogs of the Dow have averaged an 9.5% annual return since 2000, outshining the S&P 500’s 7.5% average return. Here are the 10 Dogs of the Dow for 2021.
Chevron Corp. (ticker: CVX)
The highest-yielding stock among the Dow 30 is oil major Chevron, which yields 5.6%. Oil stocks struggled in 2020 due to a sharp drop in travel demand and industrial shutdowns around the world. However, Bank of America analyst Doug Leggate says the oil market is ripe for a 2021 rebound following its worst year on record. Leggate says Chevron is an excellent source of conservative yield in the energy space and should benefit from synergy headwinds following its acquisition of Noble Energy. Bank of America has a “buy” rating and $116 price target for CVX stock.
IBM has struggled to transition its legacy business to a more cloud-centric model, but some analysts are optimistic IBM is finally approaching a return to earnings and revenue growth under new leadership. Bank of America analyst Wamsi Mohan says IBM is well-positioned to generate mid-single-digit growth in 2022 and beyond, driven by Red Hat, containers and Kubernetes. Mohan says IBM’s investment phase will continue in the near term, but its hybrid cloud investments will have tremendous long-term payoffs. In the meantime, investors get a 5.1% dividend. Bank of America has a “buy” rating and $153 price target for IBM stock.
Dow is a global chemical company that produces products such as polyolefins, chlor-alkali products and coatings. Dow’s industrial demand took a big hit in 2020 due to economic shutdowns. In the third quarter, the company reported a 9.8% year-over-year drop in revenue and a $25 million net loss. However, CFRA analyst Richard Wolfe says Dow has continued to pay down its debt even during the downturn and should more than double its earnings per share to $2.67 in 2021. Dow pays a 4.8% dividend. CFRA has a “hold” rating and $50 price target for DOW stock.
Walgreens Boots Alliance (WBA)
Walgreens Boots Alliance is one of the world’s largest pharmacies, operating nearly 10,000 stores in the U.S. alone. Walgreens shares pay about a 4% dividend, and it got a boost this month when the company reported 5.7% revenue growth in the fourth quarter. CFRA analyst Arun Sundaram says investors have been spooked by rising competition from Amazon.com (AMZN) and others, but the company’s decision to sell its pharmaceutical wholesale business and invest more heavily in its core retail business is the right move for the long term. CFRA has a “hold” rating and $46 price target for WBA stock.
Verizon Communications (VZ)
Verizon Communications is the largest U.S. wireless carrier. The stock has struggled in the past year, dropping 2.8%. However, Bank of America analyst David Barden says Verizon has multiple revenue growth opportunities in 2021 and beyond. First, 5G wireless network upgrades will be a significant tailwind. In addition, business-to-business applications and fixed wireless broadband provide opportunities for Verizon to expand its business. Barden says Verizon should outperform its major peers in earnings growth in coming years. The stock also pays almost a 4.4% dividend. Bank of America has a “buy” rating and $64 price target for VZ stock.
Shares of diversified global manufacturing giant 3M are down about 31% over the past three years. Organic revenue growth has slowed, and weakness in the auto, semiconductor and Chinese markets has weighed on demand. However, Morningstar analyst Joshua Aguilar says the market failed to appreciate the company’s solid third-quarter numbers. In fact, 3M reported 4.5% revenue growth in an extremely difficult environment last quarter. Aguilar says he disagrees with 3M bears who see the company’s model as “irretrievably broken.” The stock pays a 3.5% dividend. Morningstar has a “hold” rating and $180 fair value estimate for MMM stock.
Cisco Systems (CSCO)
About 20 years after the bursting of the dot-com bubble, networking and security technology leader Cisco Systems has transitioned from being one of the most overvalued tech growth stocks to potentially one of the most underappreciated tech value stocks. CFRA analyst Keith Snyder says the Wi-Fi 6 upgrade cycle and 5G core deployments are bullish catalysts for Cisco. In addition, rising bandwidth consumption should be a secular growth driver. Snyder says Cisco has a healthy balance sheet that facilitates share buybacks and a 3.2% dividend. CFRA has a “buy” rating and $52 price target for CSCO stock.
Merck & Co. (MRK)
Merck is one of the world’s leading pharmaceutical companies. Morningstar analyst Damien Conover says Democratic control of the Senate creates risks for drug companies, but sweeping policy changes are unlikely given such a slim congressional majority. Conover says Merck and other biopharma stocks are undervalued and have strong underlying fundamentals. In fact, Merck shares trade at a forward earnings multiple of less than 13 and pay a 3.1% dividend. Merck has an appealing combination of high-margin drugs already on the market and impressive candidates in the pipeline. Morningstar has a “buy” rating and $100 fair value estimate for MRK stock.
Amgen is a biotech company that produces treatments for inflammation, cancer and other conditions. Amgen shares are slightly down in the past year, but Bank of America analyst Geoff Meacham says the stock’s 13.8 forward earnings multiple suggests investors are showing little appreciation for Amgen’s operating leverage and solid pipeline. Amgen reported 12% revenue growth in the third quarter thanks in part to 11% sales growth in osteoporosis treatment Prolia and 22% sales growth in cholesterol drug Repatha. Amgen also has a 3% dividend. Bank of America has a “buy” rating and $265 price target for AMGN stock.
Soda giant Coca-Cola still hasn’t recovered to its early 2020 highs, but the company and its stock have a long track record of consistent returns and reliable dividends. Morningstar analyst Nicholas Johnson says the soda market is a mature market, but Coca-Cola has done an excellent job of pivoting more into high-growth beverage markets, such as premium water and energy drinks. Coca-Cola also has the stamp of approval of Wall Street investing icon Warren Buffett, who holds a 9.3% ownership stake in the company. Morningstar has a “hold” rating and $54 fair value estimate for KO stock.
Dow Dogs to adopt for 2021:
— Chevron Corp. (CVX)
— IBM (IBM)
— Dow (DOW)
— Walgreens Boots Alliance (WBA)
— Verizon Communications (VZ)
— 3M (MMM)
— Cisco Systems (CSCO)
— Merck & Co. (MRK)
— Amgen (AMGN)
— Coca-Cola (KO)
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