Seeking Alpha

Dogs Of The Dow: November May Be A Good Time To Buy Them

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Includes: CSCO, CVX, DIS, DOW, IBM, JNJ, KO, MCD, MMM, MRK, NKE, PFE, VZ, WBA, XOM
by: Fredrik Arnold
Fredrik Arnold
Dividend investing, Growth, momentum, research analyst
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. Top ten target-estimated net-gains 10/29/19 ranged 14.8%-19.33% topped by McDonald's .

High yield determined the 10 top Dow Index dogs. November's top-yield ten, CSCO, KO, WBA, MMM, PFE, CVX, VZ, IBM, XOM, & DOW averaged 3.99%.

Dow leading firms by broker target price upside, HD, MRK, PFE, XOM, CVX, NKE, JNJ,  CSCO, DIS, & MCD averaged 14.99%.

Analysts augured ten highest yield Dow stocks might produce 13.79% more gain from $5k invested in the lowest-priced five than from the same investment in all ten. Low-priced "little" dogs solidly led Dow Index again for November.

Foreword

While more than half the collection of Dow Industrials are too pricey to justify their skinny dividends, the five lowest priced Dogs of the Dow are worth a look. One of the five even lives up to the ideal of having its annual dividends from a $1K investment exceed the single share price. Four others show prices within $15 of meeting that goal.

With a little more downside market pressure, it's possible that, by the end of the year, the five lowest priced high-yield Dow stocks will all be fair-priced with their annual yield from a $1K investment meeting or exceeding their single share prices.

Actionable Conclusions (1-10): Brokers Targeted 14.8% To 19.03% Net Gains From Top Ten Dow Dogs By Early November 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 November yield-based forecast for Dow dogs, as graded by Wall St. wizards, was 50% 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 November, 2020 were:

Source: YCharts.com

McDonald's Corp. (MCD) was projected to net $190.33, based on dividends, plus the median of target price estimates from thirty-three analysts, less broker fees. The Beta number showed this estimate subject to risks 51% less than the market as a whole.

Cisco Systems Inc. (CSCO) was projected to net $185.98, based on dividends, plus the median of target price estimates from thirty analysts, less broker fees. The Beta number showed this estimate subject to risk 28% over the market as a whole.

Chevron Corp. (CVX) was projected to net $177.34, based on dividends, plus a mean target price estimate from twenty-six analysts, less broker fees. The Beta number showed this estimate subject to risks 1% under the market as a whole.

Johnson & Johnson (JNJ) netted $176.42 based on the median of target price estimates from nineteen analysts, plus dividends, less broker fees. The Beta number showed this estimate subject to risk 31% less than the market as a whole.

Exxon Mobil Corp. (XOM) was forecast to net $176.10, based on the median of target price estimates from twenty-five analysts, plus annual dividend, less broker fees. The Beta number showed this estimate subject to risk 34% less than the market as a whole.

The Walt Disney Co. (DIS) was forecast to net $175.98, based on the median of target price estimates from twenty-seven analysts, plus annual dividend, less broker fees. The Beta number showed this estimate subject to risk 4% less than the market as a whole.

International Business Machines Inc. (IBM) was projected to net $164.54, based on the median of target price estimates from twenty-two analysts, plus the estimated annual dividend, less broker fees. The Beta number showed this estimate subject to risk 33% more than the market as a whole.

Pfizer Inc. (PFE) was projected to net $160.91, based on dividends, plus a mean target price estimate from thirteen analysts, less broker fees. The Beta number showed this estimate subject to risk 34% less than the market as a whole.

Merck & Co Inc. (MRK) was projected to net $148.68, 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.

Nike Inc. (NKE) was projected to net $147.97 based on the median of target price estimates from thirty-one analysts, plus dividends, less broker fees. The Beta number showed this estimate subject to risk 15% less than the market as a whole.

The average net gain in dividend and price was estimated at 17.04% on $10k invested as $1k in each of these top ten Dow stocks. This gain estimate was subject to average risk 12% under the market as a whole.

Source: thedogvine.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 October 29, 2019 Dow 30 By Yield

Source: YCharts.com and indexArb.com

Actionable Conclusions (11-20): 10 Top Dow Dividend Stocks By Yield Ranged 2.96% To 5.44% Per YCharts & 3.15% To 5.44% Per IndexArb

Top ten Dow dogs as of 10/29/19 by both YCharts and IndexArb represented seven of eleven Morningstar sectors. Both listed the same stocks in dissimilar order.

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

Second place on both lists went to the first of two energy stocks, Exxon Mobil Corp. The other energy representative placed fifth on YCharts and fourth on IndexArb's list, Chevron Corp. [5][4].

Third place on both the YCharts and IndexArb lists went to the top of two technology firms in the top ten, International Business Machines Corp. [3]. The lone Dow index communication services firm placed fourth for YCharts but dropped to fifth on IndexArb, Verizon (VZ) [4][5] .

In sixth place on both lists was the lone healthcare representative, Pfizer [5]. One industrials firm ranked seventh on both lists, 3M Co (MMM) [7].

Then two consumer defensive firms placed eighth and ninth on both lists, Walgreens Boots Alliance Inc. (WBA) [8], and Coca-Cola Co (KO) [9]. Finally, the last of the two technology top ten placed tenth, Cisco Systems Inc. [10] to complete the October 29 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 10/29/2019. 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, only one top ten Dow stock, Dow Inc., meets that goal. Last month Pfizer Inc. also qualified but its market price was bid up to $0.27 over breakeven with the dividend paid from $1K invested.

However, four more Dow Dogs are within range of shedding prices just 24% or less to meet the goal: Exxon at $68.44 just needs a 13.8% decline to $58.99. Verizon at $60.19 needs to drop 22.08% to $49.60. Walgreens Boots Alliance is within 24% at $56.27 and just needs to drop to $42.78. Finally, Cisco Systems at $47.24 is within 20.8% of its $37.41 goal 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 67% per YCharts and 66% per IndexArb, while the dividend derived from $10k invested as $1k in each of the ten was 33% per YCharts and 34% 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 October 29, 2019 was $24.87 per YCharts or $24.16 in the IndexArb reckoning.

Price Drops or Dividend Increases of 0.7% to 55% Could Get Dow Dogs Back to "Fair Price" Rates For Investors

Source: YCharts.com

The charts above retain the current dividend amount and adjust share price to produce a yield (from $1K invested) to equal or exceed the single share price of each stock. As you can see, only Dow is clear, while Pfizer is within 1%, then Exxon, Verizon, Walgreens, and Cisco prices are currently within 24% of closing the gap between share price and dividend from $1k invested.

Source: YCharts.com

Actionable Conclusions: (22-31) Dow Shows 13.27% To 17.43% Top Ten Upsides To October 29, 2020; (32) Four Downsides -0.66 to -3.7% Were 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 13.79% Advantage For 5 Highest Yield, Lowest Priced Dow Dogs As Of October 29, 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 10/29/19 revealing the highest dividend yields represented seven 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 12.03% Vs. (34) 10.57% Net Gains by All Ten Come October 29, 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 13.79% more gain than from $5,000 invested in all ten. The second lowest priced, Cisco Systems Inc., was projected to deliver the best net gain of 18.6%.

Source: YCharts.com

The five lowest-priced Dow top-yield dogs for October 29 were: Pfizer; Cisco Systems Inc.; Dow, Inc.; Coca-Cola Co.; Walgreens Boots Alliance Inc., with prices ranging from $38.21 to $56.27.

Five higher-priced Dow top-yield dogs for September 30 were: Verizon Communications; Exxon Mobil; Chevron; International Business Machines; 3M Co., whose prices ranged from $60.19 to $168.91.

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 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.

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. Dog photo: thedogvine.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.