January Dogs Of The Dow Need A Pullback
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."
- Thirty-one 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 14.16%-28.38% topped by BA 12/29/21.
- Highest-yield 10 are the lead-Dogs of the Dow. January's YCharts-toppers are: INTC, KO, MMM, AMGN, MRK, WBA, CVX, VZ, DOW, and IBM averaging a 3.88% yield.
- Dow Industrial Index top-ten firms by broker target-price upside, CAT, JPM, DOW, VZ, HON, AXP, GS, WMT, MRK, and V, averaged 16.42% upsides.
- Analyst one-year targets showed ten highest-yield Dow stocks producing 5.16% LESS gain from $5K invested in the lowest-priced five than from the same investment in all ten. Higher-priced ("bigger" Dow dogs) took the lead by half a length based on broker-augured gains coming into January.
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Foreword
While more than half this collection of Dow Industrials is too pricey and reveals only skinny dividends, the ten lowest priced Dogs of the Dow are worth a look. This month, none of the ten live up to the dogcatcher ideal of annual dividends from $1K invested exceeding their single share prices. Five, however, showed prices within $18.00 of meeting that goal.
With renewed downside market pressure of 31%, it would be possible for KO, INTC, WBA, DOW and VZ to become elite fair-priced dogs with their annual yield (from $1K invested) meeting or exceeding their single share prices by year's end. However, exuberance has so far prevailed in the 2021 market and the prices of all Dow stocks are currently up and out of reach.
After the 2020 Ides of March dip, and others yet to come, the time to buy top yield Dow dogs briefly returned last month. A Santa Claus Rally took that window down the chimney.
[See the summary of top ten fair-priced January Dow Dogs in Actionable Conclusion 21 near the middle of this article.]
Actionable Conclusions (1-10): Brokers Expect 14.16% To 28.38% Net Gains From Top-Ten Dow Dogs As Of January 2023
Three of ten top dividend-yielding Dow dogs were verified as also 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, this January 2023 yield-based forecast for Dow dogs, as graded by Wall St. wizard estimates, was 30% accurate.
Estimates of 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 2021-22 data points for the projections below. Note: one-year target prices estimated by lone analysts were not applied. Ten probable profit-generating trades projected to December 29, 2022 were:
Source: YCharts.com
The Boeing Co (BA) was forecast to net $283.82, based on the median of target price estimates from nineteen analysts, including annual dividend, less broker fees. The Beta number showed this estimate subject to risk/volatility 52% greater than the market as a whole.
Visa Inc (V) was projected to net $245.01, based on dividends, plus the median of target price estimates from thirty-two analysts, less broker fees. The Beta number showed this estimate subject to risk/volatility 4% less than the market as a whole.
Merck & Co Inc (MRK) was projected to net $225.38, based on dividends, plus the median of target prices estimated by twenty-two analysts, less broker fees. The Beta number showed this estimate subject to risk/volatility 52% under the market as a whole.
Walmart Inc (WMT) was projected to net $189.62, based on dividends, plus the median target price estimates from twenty-two analysts, less broker fees. The Beta number showed this estimate subject to risk/volatility 49% less than the market as a whole.
Goldman Sachs Group Inc (GS) was projected to net $186.08, 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/volatility 51% over the market as a whole.
Verizon Communications (VZ) was projected to net $180.99, based on the median of target price estimates from twenty-three analysts, less broker fees. The Beta number showed this estimate subject to risk/volatility 56% under the market as a whole.
Dow Inc (DOW) was projected to net $180.00, based on the median of target estimates from twenty-one analysts, plus dividends, less broker fees. A Beta number is still not available for DOW.
American Express Co (AXP) was projected to net $154.75, based on the median of target price estimates from twenty-three analysts, plus the estimated annual dividend, less broker fees. The Beta number showed this estimate subject to risk/volatility 25% more than the market as a whole.
Honeywell International Inc (HON) netted $154.28 based on the median of target price estimates from twenty-three analysts, less broker fees. The Beta number showed this estimate subject to risk/volatility 17% greater than the market as a whole.
JPMorgan Chase & Co (JPM) was projected to net $141.59 based on the median of target price estimates from twenty-four analysts, plus dividends, less broker fees. The Beta number showed this estimate subject to risk/volatility 15% greater than the market as a whole.
The average net gain in dividend and price was estimated at 19.4% on $10K invested as $1K in each of these top ten Dow Index stocks. This gain estimate was subject to average risk/volatility equal to the market as a whole.
Actionable Conclusion (11): (Bear Alert) Analysts Predicted Three Dow Dogs To Lose 2.97%-4.48% By January 2023
The probable losing trades revealed by YCharts to 2023 were:
Source: YCharts.com
UnitedHealth Group Inc (UNH) lost $29.71 net per the median of target estimates from twenty-six analysts, including dividends, and broker fees. The Beta number showed this estimate subject to risk/volatility 16% less than the market as a whole.
Apple Inc (AAPL) lost $35.65 net per the median of target estimates from forty-one analysts, including dividends, less broker fees. The Beta number showed this estimate subject to risk/volatility 20% greater than the market as a whole.
Procter & Gamble Co (PG) lost $44.77 net per the median of target estimates from twenty-two analysts, including dividends, and broker fees. The Beta number showed this estimate subject to risk/volatility 56% under the market as a whole.
The average net loss in dividend and price was estimated to be 3.67% on $3K invested as $1K in each of these three stocks. The average Beta showed these estimates subject to risk/volatility 17% under the market as a whole.
Source: Open source dog art from dividenddogcatcher.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 January, 2022 Dow 30 By Yield
Source: YCharts.com and indexArb.com
Actionable Conclusions (11-20): 10 Top Dow Dividend Stocks By Yield Ranged 2.68% To 4.92% Per YCharts And 2.82% To 4.96% Per indexArb
Top ten Dow dogs as of 12/29/21 by YCharts and indexArb represented seven of eleven Morningstar sectors. Both listed the same ten stocks in identical order.
Both put the first of two technology dogs in first place, International Business Machines (IBM) [1] and put the second technology dog in tenth place Intel Corp (INTC) [10].
Both YCharts and indexArb put the lone basic materials dog in second place, Dow Inc [2], and put the lone communication services sector member of the top ten in third place, Verizon [3].
The fourth Dog of the Dow stock for YCharts and indexArb was the lone energy dog in the top ten, Chevron Corp (CVX) [4].
The lists agreed that the fifth through seventh place finishers were all from the healthcare sector. Both agreed that fifth place belonged to Walgreens Boots Alliance (WBA) [5], and that the sixth and seventh places belonged to Merck & Co Inc [6] in the sixth place and Amgen Inc (AMGN) [7] placed seventh.
The health team was followed by a lone industrials member, in eighth, 3M Co (MMM) [8]. Thereafter, the ninth place-holders were identical, ninth place going to the consumer defensive, standout, Coca-Cola Co (KO) [9], to complete the December 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 12/29/2021. The two sets of charts show the variation of dividends calculated by YCharts.com estimates and those from the arbitrage firm indexArb.com. There was a $0.44 difference in estimated total single share dividends between YCharts and indexArb, resulting in a $4.46 total cost per dividend dollar differential. These numbers were not enough to impact the comparative percentages.
This month, all of the 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. That condition was not reached by any Dow index members leading into January.
Actionable Conclusion (21): All Ten Top Dow Dogs Are Overbought
This gap between high share price and low dividend per $1K (or oversold condition) means, no matter which chart you read, all 27 Dow dividend payers are low risk and low opportunity dogs, with the non-dividend payers being particularly dismal. The Dow top-ten average cost per dollar of annual dividend for December 29, 2021 was $27.03 for YCharts or $26.58 by the indexArb reckoning.
One that cut its dividend in March, Boeing, has re-learned (and is now certified that it knows how to fly) and is thus prepared to take off again if someone ever orders planes made in the USA again. The used plane market, however, is soaring. BA may not ever recover from being in worse shape than was GE when excused from the Dow index. As for DIS, the magic kingdom may be close to reinstating a dividend but don't hold your breath. The oldest of the two latest no-dividend stocks on the block, CRM, is simply overpriced, whereas Kyndryl Holdings Inc (KD), spun off from International Business Machines, is underweight, being only of mid-cap heft. Those four non-dividend payers are the true down in the dumps dogs of the Dow.
Remember, this dogcatcher yield-based stock-picking strategy is contrarian. That means rooting for (buying) the underdog is productive when you don't already own these stocks. If you do hold these stocks, then you must look for opportune pull-backs in price to add to your position to best improve your dividend yield.
Price Drops or Dividend Increases Could Get All Ten 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 this illustration shows, none are in the ideal priced zone. Three low priced stocks are within $8.55 of making the grade (VZ; DOW; WBA).
Five more, however (INTC; KO; MRK; CVX; IBM) need to trim prices between $15 and $52.50. Then, two behemoth priced stocks hold the key to realizing the 50/50 goal for share prices equaling dividend payouts from $10K invested. If 3M could shed just $101.44, and Amgen could drop $139.51 in share price, the top ten as a group could attain that elusive 50/50 goal.
The alternative, of course, would be that these companies raise their dividends, but that is a lot to ask in these highly disrupted, inflationary, and cash-rich times. Mr. Market is much more effective at moving prices up or down to appropriate size.
Source: YCharts.com
Actionable Conclusions: (22-31) The Dow Index Showed 12.57% To 24.81% Top Ten Upsides To December 1, 2022; (32) Five Downsides Were Revealed By Broker 1-Yr. Targets
To quantify top dog rankings, analyst median price target estimates provided a "market sentiment" gauge of upside potential. Added to the simple high-yield "dog" metrics, analyst median price target estimates provided another tool to dig out bargains.
Analysts Forecast A 5.16% Disadvantage For 5 Highest Yield, Lowest Priced of 10 Dow Dogs As Of December 29, 2022
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 12/29/21 revealing the highest dividend yields represented seven of the eleven sectors in YCharts and indexArb reckonings. Consumer Cyclical and Financials went missing. (Real Estate is not reported and Utilities has its own Dow Index.)
Actionable Conclusions: Analysts Expected 5 Lowest-Priced of the Ten Highest-Yield Dow Dogs (34) To Deliver 11.81% Vs. (35) 12.43% Net Gains by All Ten Come December 29, 2022
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 5.16% LESS gain than from $5,000 invested in all ten. The sixth lowest priced, Merck & Co Inc, showed top analyst-estimated gains of 22.54%.
Source: YCharts.com
The five lowest-priced Dow top-yield dogs for December 29 were: Intel Corp; Walgreens Boots Alliance Inc; Verizon Communications Inc; Dow Inc; Coca-Cola Co, with prices ranging from $51.83 to $58.95.
Five higher-priced Dow top-yield dogs for December 29 were: Merck & Co Inc; Chevron Corp; International Business Machines; 3M Co; Amgen Inc, whose prices ranged from $76.95 to $227.60.
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 90% 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 but switched to conforming for the last two quarters.) In 2020, analyst projections were quite contrarian. The first half of 2021, most dividend stock price actions exceeded all analyst expectations. The last half of 2021 was still gangbusters. Future sag may free up three Dow dogs, sending them into the ideal zone where returns from $1K invested equal (or exceed) their single-share price.
Afterword
Lest there be any doubt about the recommendations in this article, this month there were no Dow Index stocks showing dividends for $1K invested exceeding their single share price.
The dogcatcher hands-off recommendations are still in place referring to one that cut its dividend in March. While Boeing has re-learned (and is certified) how to fly, it still has to find customers before it can get airborne again. BA faces strong headwinds to stay on the Dow index (despite analyst optimism for the lone American commercial air-crafter). Also keep hands off the two newest non-dividend members of the Dow, salesforce.com Inc and Kyndryl Holdings, until either declares a dividend from $1K invested greater than its single share price. While subscriptions keep the ship afloat, Disney needs audiences to get strapped back into buying tickets to watch and ride before resuming a dividend. The DIS parks are now open in CA & FL. Will anybody play there?
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.
Graphs and charts were compiled by Rydlun & Co., LLC from data derived from indexArb; YCharts; finance.yahoo.com; analyst mean target price by YCharts. Open source dog art from dividenddogcatcher.com
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This article was written by
Fredrik Arnold is a retired quality service analyst sharing investment ideas with a primary focus on dividend yields by utilizing free cash flow and one-year total returns as trading indicators.
He is the leader of the investing group The Dividend Dog Catcher, where he shares a minimum of one new dividend stock idea per week with focus on yield or extraordinary financial circumstances. All ideas are archived and available after weekly announcement. Learn more.Analyst’s Disclosure: I/we have a beneficial long position in the shares of CSCO, INTC either through stock ownership, options, or other derivatives. 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.
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.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
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