Dogs Of The Dow: Still The Best On The Market After All, Even In September

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Includes: BA, CAT, CSCO, CVX, DOW, IBM, JNJ, JPM, MMM, MRK, PFE, UNH, UTX, 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 15.7%-28.23% topped by UnitedHealth 9/9/19.

Top Dow dog by yield was Dow, Inc. The top-yield ten, JPM, CAT, WBA, MMM, PFE, CVX, VZ, IBM, XOM, and DOW averaged 4.09% yield.

Dow top ten firms by broker price upside, CAT, MSFT, CSCO, CSCO, UTX, CVX, BA, JNJ, PFE, DOW, and UNH averaged 16.99%.

Analyst one-year targets predicted that ten highest yield Dow stocks could produce 13.35% more gain from $5k invested in the lowest-priced five than from the same investment in all ten. Low-priced "little" dogs lead the broker-augured Dow Index again for September.

Foreword

While more than half the collection of Dow Industrials are too pricey to justify their puny dividends, the five lowest priced Dogs of the Dow are worth a look. Two of the five even live up to the idea of having their annual dividends from a $1K investment exceed the single share price. Three others, maybe even four, show prices within $25 of meeting that goal.

Actionable Conclusions (1-10): Brokers Targeted 15.7% To 28.2% Net Gains From Top Ten Dow Dogs By Mid- September 2020

Four 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 September yield-based forecast for Dow dogs, as graded by Wall St. wizards, was 40% accurate.

Estimates based on 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 2019-20 data points. Note: one-year target prices by single analysts were not applied. Ten probable profit-generating trades projected to September 9, 2020 were:

Source: YCharts.com

UnitedHealth Group Inc (UNH) was projected to net $282.33, based on dividends, plus the median of target price estimates from twenty-six analysts, less broker fees. The Beta number showed this estimate subject to risk 38% less than the market as a whole.

Dow Inc (DOW) was projected to net $276.85, based on the median of target price estimates from nineteen analysts, plus the estimated annual dividend, less broker fees. The beta number showed this estimate subject to risk 1% more than the market as a whole.

Pfizer Inc (PFE) was forecast to net $207.49, based fourteen analysts, plus annual dividend, less broker fees. The Beta number showed this estimate subject to risk 34% less than the market as a whole.

Johnson & Johnson (JNJ) netted $189.65 based on a target price estimate from twenty analysts, plus dividends, less broker fees. The Beta number showed this estimate subject to risk 32% less than the market as a whole.

Chevron Corp (CVX) was projected to net $181.59, based on dividends, plus a mean target price estimate from twenty-six analysts, less broker fees. The Beta number showed this estimate subject to risk 1% over the market as a whole.

Merck & Co Inc (MRK) was projected to net $174.90, based on the median of target estimates from eighteen analysts, plus dividends, less broker fees. The Beta number showed this estimate subject to risk 47% less than the market as a whole.

Boeing Co (BA) was projected to net $168.76 based on dividends, plus a median of target estimates from twenty-four brokers, less broker fees. The Beta number showed this estimate subject to risk 25% over the market as a whole.

Exxon Mobil Corp (XOM) was projected to net $163.33, based on dividends, plus the median of target price estimates from twenty-five analysts, less broker fees. The Beta number showed this estimate subject to risk equal to the market as a whole.

United Technologies (UTX) was projected to net $162.45, based on dividends, plus a mean target price estimate from nineteen analysts, less broker fees. The Beta number showed this estimate subject to risk 21% more than the market as a whole.

Cisco Systems Inc (CSCO) was projected to net $157.13 based on the median of target price estimates from twenty-nine analysts, plus dividends, less broker fees. The Beta number showed this estimate subject to risk 27% more than the market as a whole.

The average net gain in dividend and price was estimated at 19.65% on $10k invested as $1k in each of these top ten Dow stocks. This gain estimate was subject to average risk 8% under the market as a whole.

Source: animalwised.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 September 9, 2019 Dow 30 By Yield

Source: YCharts.com and indexArb.com

Actionable Conclusions (11-20): 10 Top Dow Dividend Stocks By Yield Ranged 3.12% To 6.30% Per YCharts & 3.12% To 6.30% Per IndexArb

Top ten Dow dogs as of 9/9/19 by both YCharts and IndexArb represented nine of eleven Morningstar sectors. Both listed the same stocks in identical order.

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

Second place went to the first of two energy stocks, Exxon Mobil Corp (XOM). The other energy representative placed fifth on both lists, Chevron Corp (CVX) [5].

Third place went to the lone technology firm in the top ten, International Business Machines Corp (IBM) [3]. The lone Dow index communication services firm placed fourth, Verizon (VZ) [4] on both lists.

In sixth place on both lists was the lone healthcare representative, Pfizer (PFE) [6]. Two industrials firms ranked seventh and ninth, 3MCo (MMM) [7], and Caterpillar (CAT) [9].

The lone consumer defensive firm placed eighth, Walgreens Boots Alliance Inc [8]. Finally, the lone financial services top ten ace placed tenth on both lists, JPMorgan Chase & Co (JPM) [10] to complete the September 9 top ten list of dogs of the Dow 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 9/9/2019. 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, now two top ten Dow stocks, Dow Inc., and Pfizer now meet that goal.

However, four more Dow Dogs are within range of shedding prices just 25% or less to meet the goal: Exxon at 71.49 just needs a 16% decline to $58.99. Verizon at $58.66 needs to drop 15.45% to $49.60. Walgreens Boots Alliance is within 23% at $55.59 and just needs to drop to $42.78. Finally, Coca-Cola Co needs to shed 26.6% to drop from $54.52 to $40.00 to see dividend yield from $1K invested exceed the single share price, and shrug off its overbought condition.

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% per IndexArb, while the dividend derived from $10k invested as $1k in each of the ten was 30% per YCharts and 31% per 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 September 9, 2019 was $25.51 per YCharts or $24.64 in the IndexArb reckoning.

Price Drops or Dividend Increases of 12% to 65% Could Get Dow Dogs Back to "Fair Price" Rates For Investors

Source: YCharts.com

The charts above retain the current price or dividend amount and adjusts share price or dividend to produce a yield (from $1K invested) to equal or exceed the single share price of each stock. As you can see, only Dow and Pfizer are clear, while Exxon, Verizon, and Walgreens, prices are currently within $25 of closing the gap between share price and dividend from $1k invested.

Source: YCharts.com

Actionable Conclusions (22-31): Dow Shows 12.85% To 27.36% Top Ten Upsides To September 9, 2020; (32) A Single -3.12% Downside Was Noted Per Broker 1 Yr. Targets

To quantify top dog rankings, analyst median 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 13.35% Advantage For 5 Highest Yield, Lowest Priced Dow Dogs As Of September 9, 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 9/9/19 revealing the highest dividend yields represented eight of the eleven sectors in Y-Charts and IndexArb reckonings.

Actionable Conclusions: Analysts Expected 5 Lowest-Priced of the Ten Highest-Yield Dow Dogs (33) To Deliver 15.1% Vs. (34) 13.32% Net Gains by All Ten Come September 9, 2020

Source: YCharts.com

$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 13.35% more gain than from $5,000 invested in all ten. The second lowest priced, Dow Inc (DOW), was projected to deliver the best net gain of 27.68%.

Source: YCharts.com

The five lowest-priced Dow top-yield dogs for September 9 were: Pfizer (PFE), Dow. Inc. (DOW), Walgreens Boots Alliance Inc (WBA), Verizon Communications (VZ), Exxon Mobil (XOM), with prices ranging from $36.83 to $71.49.

Five higher-priced Dow top-yield dogs for September 9 were: JPMorgan Chase & Co (JPM), Chevron (CVX), Caterpillar Inc (CAT), International Business Machines (IBM), 3M Co (MMM), whose prices ranged from $115.40 to $165.94.

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, and they have continued to be contrary for the first two quarters of 2019.)

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.

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.

Additional disclosure: 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; finance.yahoo.com; analyst mean target price by YCharts.