Seeking Alpha

Dogs Of The Dow Update For July

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Includes: BA, CAT, CSCO, CVX, DD, GS, IBM, INTC, JNJ, JPM, KO, MCD, MRK, PFE, PG, UTX, VZ, WBA, XOM
by: Fredrik Arnold
Fredrik Arnold
Dividend investing, Growth, momentum, research analyst
Summary

30 Dow stocks represent nine of 11 sectors. Dow Tracks Utilities as a separate index and omits real estate. Broker target-estimated net gains ranged from 16.5% to 27.3%.

Top Dow dog by yield was VZ. The top-yield 10 averaged 3.75% yield.

Dow top ten firms by broker target price upsides averaged 19.48% broker-estimated price gains.

Analyst one-year targets determined that the 10 highest yield Dow stocks could produce 1.69% fewer gains from $5K invested in the lowest-priced five than from $5K in all 10.

Actionable Conclusion (1-10): Brokers Forecast 14.98% To 21.65% Net Gains For Ten Dow Dogs To July 2019

Two of ten top dividend-yielding Dow dogs were verified as being among the top ten gainers for the coming year based on analyst 1-year target prices. (They are tinted gray in the chart above). So, this yield-based forecast for Dow dogs, as graded by Wall St. wizards, was 20% accurate.

Projections based on estimated dividend returns from $1000 invested in the ten highest yielding stocks and their aggregate one year analyst median target prices, as reported by YCharts, created the 2018-19 data points. Note: one year target prices by lone analysts were not applied. Ten probable profit-generating trades projected to July, 2019 were:

Caterpillar (CAT) was projected to net $272.76, based on dividends, plus a mean target price estimate from twenty-six analysts, less broker fees. The Beta number showed this estimate subject to volatility 32% less than the market as a whole.

Goldman Sachs Group (GS) was projected to net $228.71, based on target price estimates from twenty-eight analysts, plus annual dividend, less broker fees. The Beta number showed this estimate subject to volatility 31% more than the market as a whole.

DowDuPont (DWDP) was projected to net $224.44, based on a median target estimates from twenty-six analysts, plus dividends, less broker fees. The Beta number showed this estimate subject to volatility 28% more than the market as a whole.

IBM (NYSE:IBM) was projected to net $211.56, based on dividends, plus a mean target price estimate from twenty-six analysts, less broker fees. The Beta number showed this estimate subject to volatility 12% under the market as a whole.

McDonald's (MCD) was projected to net $190.08, based on dividends, plus a mean target price estimate from thirty-two analysts, less broker fees. The Beta number showed this estimate subject to volatility 35% less than the market as a whole.

United Technologies (UTX) was projected to net $185.28, based on dividends, plus a median target price form twenty-one analysts, less broker fees. The Beta number showed this estimate subject to volatility 9% more than to the market as a whole.

Boeing (BA) netted $181.87 based on a target price estimate from twenty-four analysts, plus dividends, less broker fees. The Beta number showed this estimate subject to volatility 40% more than the market as a whole.

Walgreens Boots Alliance (WBA) was projected to net $168.84, based on a median target price estimate from twenty-eight analysts, plus the estimated annual dividend, less broker fees. The Beta number showed this estimate subject to volatility 12% more than the market as a whole.

Intel (INTC) was projected to net $168.18 based on dividends, plus a median target estimate from forty-two brokers, less broker fees. The Beta number showed this estimate subject to volatility 4% under the market as a whole.

Cisco Systems (CSCO) was projected to net $164.68, based on a target price estimate from thirty-two analysts, plus dividends, less broker fees. The Beta number showed this estimate subject to volatility 10% more than the market as a whole.

The average net gain in dividend and price was estimated at 19.96% on $10k invested as $1k in each of these ten Dow stocks. This gain estimate was subject to average volatility 11% over the market as a whole.

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."

July Dow 30 Index By Yield

Actionable Conclusion (11-20) 10 Top Dow Dividend Stocks By Yield Range 2.88% To 4.6% Per YCharts & Range 3.09% To 4.69% Per IndexArb

Top ten Dow dogs as of 7/5/18 by IndexArb represented eight of eleven Morningstar sectors and YCharts-estimated yields represented seven. Top yielding stock, Verizon Communications (VZ) [1] was the lone communication services sector representative in the top ten. Second place was occupied by technology on both lists in the form of IBM (IBM) [2].

Third and fourth places on both lists were taken by, energy firm Exxon Mobil (XOM) [3], and healthcare firm, Pfizer, (PFE) [4]

Fifth and sixth places were swapped between consumer defensive and energy representatives on the YCharts versus IndexArb lists. Ycharts put the consumer defensive stock in fifth, and had the energy stock, sixth, Procter & Gamble (PG) [5/6]; Chevron, (CVX) [6/5], while Index Arb estimates reversed their order. The consumer defensive representative took the seventh space, Coca-Cola (KO) [7/7] on both lists. IndexArb.

Eighth and ninth places were swapped between healthcare and technology representatives on the YCharts and IndexArb lists. Ycharts put the health care stock in eighth, and put the energy stock, ninth, Merck & Co (MRK) [8/9]; Cisco Systems, (CSCO) [9/8], as Index Arb estimates reversed their order.

The real deviation of the two lists cam in the tenth slot. YChart had a healthcare firm tenth, Johnson & Johnson (JNJ) [10]. However, IndexArb put a financial services entity there, JPMorgan Chase (JPM) [10], to complete the YChart and IndexArb July lists of Dow dogs by yield.

Dow Dog Dividend Vs. Price Results

Graphs below show the relative strengths of the top ten Dow dogs by yield as of market close 7/5/2018. The two sets of charts show the variation of dividends calculated by YCharts.com estimates and those from the arbitrage firm IndexArb.com.

Top ten Dow dogs show an overbought condition (in which aggregate single share price of the ten exceeds projected annual dividend from $10k invested as $1k each in those ten). A dividend dogcatcher priority is to source stocks whose dividends from $1K invested exceed their single share price. On the

Dow 30 Index, none any longer meet that goal.

Actionable Conclusion (21): Dow Dogs Stay Overbought

The aggregate single share price for the top ten Dow dogs was 68% per YCharts and 67% by IndexArb, while the dividend derived from $10k invested as $1k in each of the ten was 32% and 33% by those two estimates.

This gap between high share price and low dividend per $1k (or oversold condition) means, no matter which chart you read, these are low risk and low opportunity Dow dogs. The Dow top ten average price per dollar of annual dividend for July 6, 2018 was $27.18 per YCharts or $26.71 in the IndexArb reckoning.

Actionable Conclusions: (22-31) Dow Has 16.06% To 26.74% Top Ten Upsides To July 2019; (32) No Downsides Were Noted

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

Analysts Cast A 1.69% Disadvantage For 5 Highest Yield, Lowest Priced Dow Index Stocks To July 2019

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

As noted above, top ten Dow dogs selected 7/5/18 showing the highest dividend yields represented seven of eleven sectors in Y-Charts reckoning of the index.

Actionable Conclusions: Analysts Expected 5 Lowest-Priced of the Top Ten Highest-Yield Dow Dogs (33) To Deliver 12.52% Vs. (34) 12.73% Net Gains by All Ten Come July 2019

$5000 invested as $1k in each of the five lowest-priced stocks in the top ten Dow Dividend kennel by yield were predicted by analyst 1-year targets to deliver 20.76% LESS than from $5,000 invested in all ten. The tenth lowest priced Dow top yield dog, IBM (IBM), was projected to deliver the best net gain of 21.34%.

The five lowest-priced Dow top yield dogs for July 5 were: Pfizer (PFE); Cisco Systems (CSCO); Coca-Cola (KO); Verizon Communications (VZ); Merck & Co. (MRK), with prices ranging from $36.87 to $61.64.

Five higher-priced Dow dogs for July 5 were: Procter & Gamble (PG); Exxon Mobil (XOM); Chevron (CVX); Johnson & Johnson (JNJ); International Business Machines (IBM), whose prices ranged from $79.21 to $141.43.

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.

See my instablog for specific instructions about how to best apply the dividend dog data featured in this article, this glossary instablog to interpret my abbreviated headings, and this instablog to aid your safe investing. -- Fredrik Arnold

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.

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, Yahoo Finance; analyst mean target price by Thomson/First Call from Yahoo Finance. Dog photo taken from sharesinv.com.

Disclosure: I am/we are long CSCO, PFE, INTC. 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.