Dow Dogs Barking: Dow Tops By Yield, UnitedHealth Tops By Broker Bets In May

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Includes: BA, CAT, CVX, DOW, GS, IBM, JPM, KO, MMM, MRK, PFE, PG, UNH, VZ, WBA, 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 a consideration."

30 Dow stocks represent nine of eleven sectors. Dow tracks utilities as a separate index and omits real estate. Broker top ten target-estimated net-gains ranged 10.65%-24.92% topped by UnitedHealth 4/25/19.

Top dog by yield was Dow, Inc. The top-yield ten, PG, MMM, WBA, KO, PFE, CVX, XOM, VZ, IBM, & DOW averaged 3.84% yield. These are the Dow Dogs 4/25/2019.

Dow top ten firms by broker target price upsides, V, MSFT, CAT, GS, BA, WBA, MRK, BA, PFE, CVX, & UNH, averaged 14.6% in broker-estimated price-upsides.

Analyst one-year targets predicted that the ten highest yield Dow stocks could produce 4.96% more gain from $5k invested in the lowest-priced five than from $5k in all ten. Low-priced "little" dogs are leading the broker-augured Dow Index into May.

Actionable Conclusions (1-10): Brokers Predicted 10.65% To 24.91% Net Gains From Top Ten Dow Dogs By May 2020

Five 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 below). So, our April yield-based forecast for Dow dogs, as graded by Wall St. wizards, was 50% accurate.

Source: YCharts.com

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 2019-20 data points. Note: one-year target prices by lone analysts were not applied. Ten probable profit-generating trades projected to April 25, 2020 were:

UnitedHealth Group Inc. (UNH) netted $249.15 based on a target price estimate from twenty-six analysts, plus dividends, less broker fees. The Beta number showed this estimate subject to risk 21% less than the market as a whole.

Chevron Corp. (CVX) was projected to net $222.09, based on dividends, plus a mean target price estimate from eighteen analysts, less broker fees. The Beta number showed this estimate subject to risk 3% over the market as a whole.

Pfizer Inc. (PFE) was projected to net $190.25, based on the median of target estimates from fifteen analysts, plus dividends, less broker fees. The Beta number showed this estimate subject to risk 25% less than the market as a whole.

Merck & Co. (MRK) was projected to net $168.92, based on a median target price estimate from seventeen analysts, plus the estimated annual dividend, less broker fees. The Beta number showed this estimate subject to risk 37% less than the market as a whole.

Walgreens Boots Alliance (WBA) was projected to net $168.05, based on dividends, plus the median of target price estimates from twenty-four analysts, less broker fees. The Beta number showed this estimate subject to risk 14% less than the market as a whole.

Boeing Co. (BA) was projected to net $149.17 based on dividends, plus a median of target estimates from thirty-two brokers, less broker fees. The Beta number showed this estimate subject to risk 33% over the market as a whole.

Goldman Sachs Group Inc. (GS) was projected to net $142.95, based on dividends, plus the median of target price estimates from twenty-eight analysts, less broker fees. The Beta number showed this estimate subject to risk 22% more than the market as a whole.

Caterpillar Inc. (CAT) was projected to net $117.19 based on the median of target price estimates from twenty-six analysts, plus dividends, less broker fees. The Beta number showed this estimate subject to risk 46% more than the market as a whole.

Verizon Communications (VZ) was projected to net $107.51, based on dividends, plus a mean target price estimate from thirty analysts, less broker fees. The Beta number showed this estimate subject to risk 49% less than the market as a whole.

International Business Machines Corp. (IBM) was forecast to net $106.50, based on target price estimates from nineteen analysts, plus annual dividend, less broker fees. The Beta number showed this estimate subject to risk 25% more than the market as a whole.

The average net gain in dividend and price was estimated at 16.22% on $10k invested as $1k in each of these ten Dow stocks. This gain estimate was subject to average volatility 2% under the market as a whole.

Source: bauaerhausstl.wordpress.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 April 25, 2019 Dow 30 Index By Yield

Actionable Conclusion (11-20) 10 Top Dow Dividend Stocks By Yield Ranged 2.89% To 5.06% Per YCharts & 2.92% To 5.06% Per IndexArb

Top ten Dow dogs as of 4/25/19 by YCharts represented seven sectors and IndexArb represented eight of eleven Morningstar sectors. Both listed the same top nine stocks but Index.Arb elevated JPM to the top ten and dropped PG to the lower level. Thus, the seventh to tenth picks differed per IndexArb.

Top yielding stock, Dow, Inc. (DOW) [1] was the lone basic materials sector representative in the top ten.

Second place went to the lone technology firm in the top ten, International Business Machines Corp. [2]. The lone Dow index communication services firm placed third, Verizon [3].

Fourth and fifth places went the the two energy firms, Exxon Mobil (XOM) [4] and Chevron Corp. [5] in both YCharts and IndexArb lists. In sixth place on both lists was Healthcare firm, Pfizer [6].

The two lists switched positions of the seventh and eighth place dogs. Ycharts puts Coca-Cola Co. (KO) [7][8] in seventh, while IndexArb dropped that firm into eighth, and YCharts had Walgreens Boots Alliance [8][7] in seventh, whereas YCharts puts WBA in eighth.

YCharts had the industrials rep placed ninth, 3M Co. (MMM) [9][10], however, IndexArb had 3M tenth and put JPMorgan Chase (JPM) [9] [0] (a lone financial service representative) in ninth. YCharts yield ranking puts Procter & Gamble (NYSE:PG) (a third consumer defensive representative) in tenth place and eschewed JPM from the top ten, to complete the April 25 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 4/25/2019. 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 select stocks whose dividends from $1k invested exceed their single share price. In the Dow 30 Index, no Dow stock any longer meets that goal.

However, four Dow Dogs are within range of shedding prices just 25% or less to meet the goal. Dow, Inc. at $55.33 needs to drop just 4.4% to $52.90. Verizon at $55.85 needs to drop 12.26% to $49.00. Pfizer at $39.62 is within 4.3% of $37.90 to make goal. Finally, Coca-Cola Co. needs to shed 16.39% to drop from $47.84 to $40.00 to see dividend yield from $1k invested exceed the single share price.

Actionable Conclusion (21): Dow Dogs Stay Overbought

The aggregate single share price vs. dividend yield for the top ten Dow dogs was 70% per YCharts and 69% for IndexArb, while the dividend derived from $10k invested as $1k in each of the ten was 30% 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 April 25, 2019 was $26.57 per YCharts or $26.05 in the IndexArb reckoning.

Price Drops of 5% to 65% 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 Dow, Verizon, Coca-Cola, and Pfizer prices are currently within $25 of closing the gap between share price and dividend from $1k invested.

Source: YCharts.com

Actionable Conclusions: (22-31) The Dow Index Shows 9.43% To 24.36% Top Ten Upsides To April 25, 2020; (32) Five 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 Forecast A 4.96% Advantage For 5 Highest Yield, Lowest Priced Of April 25, 2020

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

Source: YCharts.com

As noted above, top ten Dow dogs selected 4/25/19 revealing the highest dividend yields represented eight 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 12.17% Vs. (34) 11.59% Net Gains by All Ten Come April 25, 2020

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 1-year targets to deliver 4.96% more gain than from $5,000 invested in all ten. The eighth lowest priced (CVX) was projected to deliver the best net gain of 22.21%.

Source: YCharts.com

The five lowest-priced Dow top-yield dogs for April 25 were: Pfizer; Coca-Cola; Walgreens Boots Alliance Inc.; Dow. Inc.; Verizon Communications, with prices ranging from $39.61 to $55.85.

Five higher-priced Dow top-yield dogs for April 25 were: Exxon Mobil; Procter & Gamble Co.; Chevron; International Business Machines; 3M Co., whose prices ranged from $82.22 to $190.72.

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.)

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; analyst mean target price by Thomson/First Call in YahooFinance. Dog photo: bauaerhausstl.wordpress.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.