Tis 'Dogs Of The Dow' Season: Prepare To Buy

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Includes: AAPL, BA, CAT, CSCO, CVX, DWDP, GS, IBM, JPM, KO, LBM, MMM, MRK, PFE, PG, UTX, VZ, XOM
by: Fredrik Arnold
Summary

The Dow® adds a stock if the company has an excellent reputation, demonstrates sustained growth, and is of interest to a large number of investors. Sector representation is also considered.

30 Dow stocks represent nine of eleven sectors. Dow tracks utilities as a separate index and omits real estate. Broker target-estimated net-gains ranged 27.09-55.15% topped by Goldman as of 12/28/18.

Top Dow dog by yield was IBM. The top-yield ten, MRK, CSCO, PG, JPM, KO, PFE, CVX, VZ, XOM, & IBM averaged 3.8%. Top-yielders are Dow Dogs for 2019.

Dow top ten firms by broker target price upsides, JPM, CAT, CVX, XOM, BA, IBM, AAPL, UTX, DWDP, & GS averaged 36.38% broker-estimated price gains.

Analyst one-year targets predicted that ten highest yield Dow stocks could produce 17.67% less gain from $5k invested in the lowest-priced five than from $5k in all ten. High-priced "big" dogs led the broker-augured Dow Index again.

Source: YCharts.com

Actionable Conclusions (1-10): Brokers Predicted 27.09% To 55.15% Net Gains For Ten Dow Dogs By Late December 2019

Four of ten top dividend-yielding Dow dogs were verified as being among the top ten gainers for the coming year based on analyst one-year target prices. (They are tinted gray in the chart above). So, our yield-based forecast for Dow dogs, as graded by Wall Street wizards, was 40% accurate.

Projections based on estimated dividend returns from $1,000 invested in the ten highest yielding stocks and their aggregate one-year analyst median target prices, as reported by YCharts, created the 2018-2019 data points. Note: one-year target prices by lone analysts were not applied. Ten probable profit-generating trades projected to December 28, 2019, were as follows:

Goldman Sachs Group (GS) was forecast to net $551.49 based on target price estimates from twenty-eight analysts plus annual dividend, less broker fees. The Beta number showed this estimate subject to volatility 10% more than the market as a whole.

DowDuPont (DWDP) was projected to net $415.68 based on a median target estimates from twenty-three analysts plus dividends, less broker fees. The Beta number showed this estimate subject to volatility 50% more than the market as a whole.

United Technologies Corp. (UTX) was projected to net $412.88 based on dividends plus a mean target price estimate from nineteen analysts, less broker fees. The Beta number showed this estimate subject to volatility 7% more than the market as a whole.

Apple Inc. (AAPL) was projected to net $398.55 based on dividends plus the median of target price estimates from forty-four analysts, less broker fees. The Beta number showed this estimate subject to volatility 20% more than the market as a whole.

International Business Machines (NYSE:IBM) was projected to net $359.10 based on dividends plus a mean target price estimate from twenty-one analysts, less broker fees. The Beta number showed this estimate subject to volatility 20% over the market as a whole.

Boeing Co. (BA) was projected to net $324.02 based on dividends plus the median of target estimates from twenty-one brokers, less broker fees. The Beta number showed this estimate subject to volatility 30% over the market as a whole.

Exxon Mobil Corp. (XOM) netted $313.43 based on a target price estimate from twenty-four analysts plus dividends, less broker fees. The Beta number showed this estimate subject to volatility 16% less than the market as a whole.

Chevron (CVX) was projected to net $298.73 based on a median target price estimate from twenty-five analysts plus the estimated annual dividend, less broker fees. The Beta number showed this estimate subject to volatility 13% more than the market as a whole.

Caterpillar (CAT) was projected to net $293.11 based on dividends, plus a mean target price estimate from twenty-seven analysts, less broker fees. The Beta number showed this estimate subject to volatility 60% more than the market as a whole.

JPMorgan Chase & Co. (JPM) was projected to net $270.92 based on a median target price estimate from twenty-nine 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 36.38% on $10k invested as $1k in each of these ten Dow stocks. This gain estimate was subject to average volatility 20% above the market as a whole.

Source: marketwatch.com

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".

The December 28, 2018, Dow 30 Index By Yield

Source: YCharts.com and indexarb.com

Actionable Conclusion (11-20): 10 Top Dow Dividend Stocks By Yield Range 2.92% To 5.56% Per YCharts & Range 3.00% To 5.74% Per IndexArb

Top ten Dow dogs as of 12/28/18 by YCharts represented eight of eleven Morningstar sectors, while IndexArb showed nine. Both listed the same top nine but in different orders and had dogs from differing sectors in the tenth slot.

Top yielding stock, International Business Machines Corp. [1] was the top of two technology sector representatives in the top ten. The other tech representative placed ninth by YCharts and seventh by IndexArb was Cisco Systems (CSCO) [9] [7].

Second through fourth places went to two energy firms in second and fourth places Exxon Mobil [2] and Chevron Corp. [4], while the lone communication services representative in the index placed third was Verizon Communications (VZ) [3], in both lists.

Fifth place went to the healthcare representative per YCharts but took eighth per IndexArb, Pfizer (PFE) [5][8]. The top consumer defensive representative placed sixth on both lists was Coca-Cola (KO) [6]. However, the other consumer defensive rep placed eighth by YCharts and ninth per Index ARB was Procter & Gamble (PG) [8][9].

The lone financial services firm placed seventh per YCharts but was fifth in the IndexArb scheme was JPMorgan Chase & Co. [7] [5].

Finally, a healthcare representative was placed tenth on the YCharts list, Merck & Co. Inc (MRK) [10], while an industrials entrant was tenth on IndexArb list, 3M Co. (MMM) [10], to complete the YCharts and IndexArb December 28 top ten list of Dow dogs by yield.

Source: YCharts.com and indexArb.com

Dividend Vs. Price Results

Graphs above show the relative strengths of the top ten Dow dogs by yield as of market close 12/28/2018. 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. In 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 66% per YCharts and 69% for IndexArb, while the dividend derived from $10k invested as $1k in each of the ten was 34% per YCharts and 31% for IndexArb.

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 December 28, 2018, was $25.53 per YCharts or $25.55 in the IndexArb reckoning.

Price Drops of 10% to 45% Could Get Dow Dogs Back to Normal "Fair Trade" Rates For Investors

Source: YCharts.com

The chart above assumes the current dividend amount and adjusts share price to produce a yield (from $1K invested) to exceed the single share price of each stock. As you can see, only Exxon, Verizon, Cisco, and Pfizer prices are currently within $12 of closing the gap between share price and dividend from $1k invested.

Source: YCharts.com

Actionable Conclusions: (22-31) Dow Shows 25.8% To 22.2% Top Ten Upsides To December 28, 2019; (32) One -0.31% Downside Noted Per Broker 1 Yr. Targets

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 Forecast A 17.67% Disadvantage For 5 Highest Yield, Lowest Priced Dow Index Dogs To December 28, 2019

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

Source: YCharts.com

As noted above, top ten Dow dogs selected 12/28/18 revealing the highest dividend yields represented eight or nine of the eleven sectors in YCharts and IndexArb reckonings.

Actionable Conclusions: Analysts Expected 5 Lowest-Priced of the Ten Highest-Yield Dow Dogs (33) To Deliver 15.6% Vs. (34) 18.84% Net Gains by All Ten Come December 28, 2019

Source: YCharts.com

$5,000 invested as $1k in each of the five lowest-priced stocks in the top ten Dow Dividend kennel by yield were predicted by analyst one-year targets to deliver 17.67% LESS than from $5,000 invested in all ten. The tenth lowest priced Dow top yield dog, International Business Machines Corp., was projected to deliver the best net gain of 35.9%.

Source: YCharts.com

The five lowest-priced Dow top yield dogs for December 28 were: Cisco Systems, Pfizer, Coca-Cola, Verizon Communications, and Exxon Mobil, with prices ranging from $42.77 to $68.17.

Five higher-priced Dow dogs for December 5 were: Merck & Co. Inc., Procter & Gamble, JPMorgan Chase & Co., Chevron, and International Business Machines, whose prices ranged from $75.37 to $113.03.

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. (In 2017, the market somewhat followed analyst sentiment. In 2018, analysts estimates were contrarian indicators of market performance.)

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 www.indexarb.com, YCharts.com, finance.yahoo.com, and analyst mean target price by Thomson/First Call in Yahoo Finance. Dog photo: marketwatch.com.

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