8 Dow Stocks Likely To Outperform

Many academic studies have shown that dividend-paying stocks outperform their non-paying brethren by leaps and bounds over time.

Further to that, I took a look at the current constituents of the Dow Jones Industrials Index, and the current yields available there, with the idea that, based on today's share prices, some of the companies are better situated to outperform the index over the next while. Here are the recent stock prices and the most recent dividends payable for each company (sorted by dividend yield):

Stock - Current Price - Dividend Yield (%)

Bank of America - $29.58 - 8.65%
Pfizer - $18.89 - 7.09%
Citigroup - $18.85 - 6.79%
AT&T - $31.40 - 5.48%
Verizon Comm. $34.45 - 4.99%
Merck - $32.68 - 4.65%
General Electric - $28.71 - 4.53%
Home Depot - $23.80 - 3.91%
JPMorgan Chase - $39.52 - 3.85%
Dupont - $43.81 - 3.74%
Chevron - $82.56 - 3.23%
American Int'l. Group $27.24 - 3.23%
Coca-Cola - $52.06 - 3.07%
3M - $70.95 - 2.90%
Johnson & Johnson - $69.03 - 2.72%
Boeing - $63.83 - 2.66%
McDonalds - $58.65 - 2.64%
Procter & Gamble - $64.46 - 2.64%
Intel - $22.01 - 2.61%
Caterpillar - $70.48 - 2.47%
United Technologies - $65.23 - 2.19%
Alcoa - $31.81 - 2.14%
American Express - $36.62 - 2.05%
ExxonMobil - $81.70 - 2.02%
Microsoft - $26.16 - 1.80%
Wal Mart - $56.83 - 1.74%
IBM - $128.53 - 1.63%
Disney - $31.10 - 1.25%
Hewlett Packard - $43.71 - 0.73%
General Motors - $11.90 - nil (dividend suspended)

These stocks have a median yield as represented by Johnson & Johnson/Boeing of 2.68% and a mean average yield of 3.25%.

What I am looking for here is stocks that seem to be mispriced in my favor. In other words, the dividend yield is higher than might be expected, while the prospects going forward over the intermediate term (5 years or so) for the company remain decent or better.

Furthermore, I am looking for companies whose future is less likely to be impacted by higher inflation than average - typically, companies that have lower than average CAPEX requirements. Overall, this is an approach similar to a "Dogs of the Dow" strategy.

Leaving aside the prospects for the financial companies, who have an uncertain outlook - to say the least - over the next while, I like the following basket as likely to outperform:

Drug Companies:
Merck, Pfizer
Communications:
Verizon, AT&T
Consumer:
Coca-Cola, Johnson & Johnson, Proctor & Gamble
Other:
General Electric

These stocks have a median dividend yield of 4.59% and a mean average dividend yield of 4.40%.

While I like the prospects of some of the companies whose dividends lie in the bottom half, I think that their yield indicates that the market likes them a bit too much at present. If their dividend yield were to rise, the following companies might also interest me:

Hewlett-Packard, Disney, Wal-Mart, Microsoft, Intel, McDonalds (good news already priced in).

We'll check back on this basket at my annual review cycle, versus the Dow Jones Industrial Average ETF "DIA" which is currently priced at $113.17.

Disclosure: No positions held.

Comments

[TraderGreg:]

My bet: your basket will be down, and DIA will be down. The DIA will be more down than your basket. I hope, it'll make you happy :-)

2008 Jul 27 02:48 PM

[Emerald:]

Perhaps down, but good upside numbers over the next three years.

2008 Jul 27 03:19 PM

[pennystocks...:]

You stock market genius, find out first whether it is Proctor & Gamble or Procter & Gamble. Why should we take you seriously?

By the way, what really matters is the dividend growth rate, esp. given the current inflationary environment. Of course, not a single word from you. And that guy wrote a book about stock-picking!

2008 Jul 27 03:32 PM

[2houndz:]

Comments here are just brutal, but I have to agree that this is worthless advice.

2008 Jul 27 04:16 PM

[MistaWhite:]

The dogs of the dow might have worked back in the day. Some of those dogs are dogs now. I think the same thing can be applied; however, there needs to be more homework done this time around.

2008 Jul 27 04:58 PM

[samadams:]

Look for safe and growing dividends not just high yield. You also left the 2 cash cows of Chevron/Exxon off your list. Pfizer has no pipeline, I could go on but no point. Hate to be mean but this is a useless post.

2008 Jul 27 07:01 PM

[techy:]

i totally agree....just buying a stock for dividend can get you killed...

how can you recommend financials when their books are completely opaque??

beware of GE also...its almost like 50% financial.

PFE may have no drug in pipeline...but the stock is priced very low.....start building position now...i think the bottom will not be below 16, and one good catalyst will send this stock to 20

2008 Jul 27 08:18 PM

[scorp99cam:]

At least be fair. He showed the highest yields, then selected the ones he felt were mispriced. It is important to be skeptical, but he had a point and he made it. He was attempting dogs of the dow with a brain. Whether or not you would like to investigate further is up to you.

2008 Jul 27 08:55 PM

[User 105479:]

How can you put MRK and PFE in the list. Pharma stocks do not really depend entirely on dividend yield and P/E ratio ( please note, I said entirely!). Pipelines, patent expiration and competitive landsacpe all play a role. If you want to dig deeper, look at MRK, a good company and a good stock has been beaten down--
why?
1. Vytorin Gate ( bigger impact for SGP)- and one more recent negative news SEAS ( clinical trial where Vytorin did show efficacy but failed to meet primary end point).
2. Cordaptive (MRK's cholesterol drug) that got dinged by the FDA and the stock was down 10% that day..

Please keep in mind that pharma as a sector is not as defensive as it used to be ( may be little less cyclical) and even within the sector the most important thing is individual stock not just dividend yield and P/E.

Long stocks with in US Pharma:
SGP

EU:
NVS

2008 Jul 28 03:56 AM

[Steve Alexa...:]

Most of the comments here are typical emotionally driven investing, which has failed in the past and will continue to fail. Dogs of the Dow has been a successful strategy over long periods of time and will likely continue to be. Sure some of these may see dividend cuts (particularly financials), but over the long run the vast majority will maintain and even raise the dividend. Don't let a few months of macro concerns deter you from following strategies that are proven over long periods of time. Nobody can predict the overall economy, but it seems everyone thinks they can.

Steve
magicdiligence.com

2008 Jul 28 10:14 AM

[John Lounsbury:]

Jay - - - Some of the criticism is a little over the top. You have good logic even though I am not ready to buy your all your conclusions. I am looking closely at VZ, JNJ and GE for attractive entries, but none of the others. By the way, I believe "mean" and "average" are synonyms, and, therefore, mean average is redundant.

2008 Jul 28 10:52 AM

[mouth:]

PFE has cash flow and the dividend looks good. Look for it to start buying other companies with good cash flow or stong pipelines/drugs

2008 Jul 28 10:52 AM

[mouth:]

Back to Pharma. ABT has a ton of stuff in the pipeline. It has been rising

2008 Jul 28 10:55 AM

[Calvin C.:]

Great companies, bad timing.

2008 Jul 28 10:10 PM

[pecker:]

when we get a sane man in as president all these stocks are going to go thru the roof. just don't buy defense st9ocks anymore.

2008 Jul 29 01:15 AM