As we come to terms with the new normal of low interest rates and choppy markets, the combination of large companies paying dividends is certainly appealing. We now take a slightly different slant to come up with ideas for the long term investor.
Ilan Moscovitz from the Motley Fool looks into where they may be bargains but limited to those in the Dow Jones list yet those you can buy for less than they are probably worth. He built a screen to rank all 30 Dow stocks by order of their dividend yield, earnings growth, and price-to-earnings multiples.
He then listed the top ten.
Projected Earnings Growth
|2||JPMorgan Chase (NYSE:JPM)||2.8%||4%||7.5|
|8||General Electric (NYSE:GE)||3.6%||9%||15.1|
|10||American Express (NYSE:AXP)||1.5%||7%||12.2|
Source: S&P Capital IQ. Projected earnings growth estimates are 60% of consensus estimates to adjust for historical rates of over-optimism.
Any company on the Dow Jones is going to be large and able to weather the current turbulence. The fact that these stocks are depressed in value means that their immediate history might be unfavorable, but, if nothing else, this should be a portfolio worth watching.
We will start by measuring it against our dividend bearing ETF portfolio:
|Asset||Fund in this portfolio|
|REAL ESTATE||(NYSEARCA:ICF) iShares Cohen & Steers Realty Majors|
|FIXED INCOME||(NYSEARCA:TIP) iShares Barclays TIPS Bond|
|Emerging Market||(NYSEARCA:VWO) Vanguard Emerging Markets Stock ETF|
|US EQUITY||(NYSEARCA:DVY) iShares Dow Jones Select Dividend Index|
|US EQUITY||(NYSEARCA:VIG) Vanguard Dividend Appreciation ETF|
|INTERNATIONAL EQUITY||(NYSEARCA:IDV) iShares Dow Jones Intl Select Div Idx|
|High Yield Bond||(NYSEARCA:HYG) iShares iBoxx $ High Yield Corporate Bd|
|INTERNATIONAL BONDS||(NYSEARCA:EMB) iShares JPMorgan USD Emerg Markets Bond|
- The Dow`s 10 Biggest Bargain Stocks -- Total of $10K invested equally in each stock
- Retirement Income ETFs Tactical Asset Allocation Moderate -- Above funds using TAA (40% fixed income, 30% for each of the top two asset classes)
- Retirement Income ETFs Strategic Asset Allocation Moderate -- Above funds using SAA (40% fixed income, 12% for each of the five asset classes -- funds selected based on price momentum)
Portfolio Performance Comparison
|Portfolio/Fund Name||1Yr AR||1Yr Sharpe||3Yr AR||3Yr Sharpe||5Yr AR||5Yr Sharpe|
|Retirement Income ETFs Tactical Asset Allocation Moderate||1%||9%||9%||72%||8%||55%|
|Retirement Income ETFs Strategic Asset Allocation Moderate||1%||6%||16%||98%||2%||7%|
|The Dow`s 10 Biggest Bargain Stocks||3%||11%||27%||94%||2%||5%|
We can see that the returns performance is a little ahead of the buy and hold ETF portfolio. However, notice that the Sharpe ratios are lower -- indicating there is more risk with the return. That is not too surprising seeing that this is one asset class -- less diversified and has no balancing or other activity. So this is decent performance.
However, it isn't really anything very exciting.
Three Month Chart One Year Chart Three Year Chart Five Year Chart
As I review the graphical information, I note that this is indeed a volatile set of equities but they are on an upswing. This is because large cap stocks with dividends are going to be favored and a number of these stocks are dividend payers.
For those who are willing to accept a little more risk, I think it is a reasonable hypothesis that undervalued stocks in the Dow Jones list will do well. However, we have previously reviewed Dow Jones Stocks and I think there are better selections.
Additional disclosure: MyPlanIQ does not have any business relationship with the company or companies mentioned in this article. It does not set up their retirement plans. The performance data of portfolios mentioned above are obtained through historical simulation and are hypothetical.