2023-04-19 17:42:08 ET
Summary
- The 5 highest-yielding stocks in the Dow Jones Industrial Average all pay dividend rates of at least 4.9%. That's more than 3 times that of the S&P 500 Index.
- These blue chip stocks (VZ, MMM, WBA, IBM, DOW) reflect the current state of the stock market. It is a "stuck" market, with little sustained price direction.
- For dividend income fans, those yields could be sufficient for now, while the Dow and the broader market make a decision.
The dividend yield of the Dow Jones Industrial Average is toward the bottom of its 10-year range, at about 1.9%. But a closer look reveals 5 stocks of the 30 Dow components, which offer forward yields of close to 5% or more. In a market starved for yield, much less price action, this is a good time to take a closer look at those 5 names, in hopes of finding something actionable.
I essentially did a "mark to market" of the old Dogs of the Dow approach. However, instead of identifying the top 10 highest yielders at year-end, as that method typically does, I limited my analysis to the 5 highest yielders as of this writing.
5 Current Dogs of the Dow:
Verizon Communications Inc. ( VZ )
3M Company ( MMM )
Walgreens Boots Alliance, Inc. ( WBA )
International Business Machines Corporation ( IBM )
Dow Inc. ( DOW )
When I did that, I came up with the following:
1. From a fundamental standpoint, they are all selling at discount on a forward P/E basis, and all sit well below their Enterprise Value, as estimated by Seeking Alpha's quantitative research.
2. Seeking Alpha quant scores for all 5 are solid. Not spectacular, but solid.
3. From a technical/chart standpoint, they all possess the same middling, non-committal, grey area type of picture I see in many parts of the stock market right now.
Sum it all up, and I conclude that investing primarily to get those 5% dividends, given the blue chip nature of these 5 businesses, this is a decent time to own them. But as total return investments, the jury is still very much out. And from the looks of this market, that jury may be sequestered a bit longer.
Yields in the 5% Range for Blue Chips: Not Bad!
As this table shows, all 5 stocks yield close to or above 5%. The 3 highest yielders, VZ, MMM, and WBA, are also selling at significant discounts to their 4-year average dividend yield, a statistic I find helpful and telling. In my own stock investing, I often tend to look for companies selling at historically high yields versus their own history, assuming there are no obvious fundamental blowup risks at hand. This is the same type of logic bond buyers use in evaluating bond yields. If I can buy these stocks at a yield "discount", i.e., higher than normal yield, I lock that dividend payment in, plus I have potential growth in the dividend. That said, these 5 stocks are not high dividend growth candidates, as you can see on the far right of the table.
Profitability and Valuation: Yes. Earnings Growth: No
Examining the Seeking Alpha fundamental quant grades for these 5 Dow components, they are all in the 2.8-3.4 range, respectable levels at this point in the market cycle. The median Dow stock currently carries about a 3.4 Quant Score, so all 5 are in that middle range.
These are all graded as solidly profitable companies, which is not a big surprise, given their membership in the Dow Industrials. They all carry strong valuation grades, too. But as with most of the Dow 30, if an investor is looking for high projected earnings growth, they should probably look elsewhere. Only 6 of the 30 stocks even get a B grade for growth, and none of these 5 scores above a D. So, this is clearly a tradeoff: More dividend yield now, in exchange for a lower potential total return in bull market conditions.
However, we don't have a bull market right now, and I believe earnings growth is going to be hard to come by for most companies. Earnings revisions are likely to have a strong downward bias in the quarters ahead, and that may make these higher-yielding Dow stocks more attractive, as those dividends act as the proverbial "bird in the hand."
Technicals: Going Nowhere Fast?
Finally, here's a chart view of those 5 stocks. There's a common denominator to all of them, as there is with most stocks I look at right now. They are stuck in "no man's land," a trading range with no clear leaning either way.
Barchart.com Barchart.com Barchart.com Barchart.com Barchart.com
Dow Dogs that Can Hunt?
While the technical picture shows a bunch of stocks caught in a range (at best), that's not the worst thing if their dividend yields are at such a high premium to the overall market, and to their own history. In this sense, if their prices are range-bound going forward, and their dividends remain stable, their total return experience would likely exceed that of corporate bonds, with much more potential upside from an eventual next equity bull market.
This is a strategy article intended to zero in on one potential sign of life in a generally lifeless US stock market, at least for many of the blue chip names. Thus, I am not offering Buy-Hold-Sell opinions on each stock.
However, I can say this: For investors looking at mega-caps with yield, and who can turn a blind eye toward the inevitable market risks that 2023 is still going to deal with, these 5 stocks do offer an alternative to suddenly sliding bond yields, and the long-term upside potential of the non-tech portion of the large-cap stock market. In other words, they likely represent a lower relative volatility path for yield-hungry portfolios, at a time when dividend rates for quality businesses are especially difficult to find.
For further details see:
5 Dogs Of The Dow: Yield, Quality, But Little Momentum