“Dogs of the Dow” has long been a popular investing strategy followed by many a wily investor. Simply put, it involves buying ten of the highest yielding dividend stocks in the Dow Jones Industrial Average at the start of each year and betting that they will outperform the market.
This value investing approach outperformed the markets for the past four years straight and seven out of the last ten years. But it didn’t pay off this year when momentum stocks performed much better than any other segment of the market.
So far in 2019, from the group, only Procter & Gamble Company (NYSE:PG) is doing better than the S&P 500, which surged 26% in 2019. The average return for the Dogs is just 8.6% this year.
But, for those interested in trying the strategy in 2020, below are three top yielding stocks from the DJIA whose prospects it may be worth analyzing:
1. Dow Inc.
Dow Inc (NYSE:DOW), a material sciences, plastics and silicones giant, should be a compelling income-generating opportunity next year due to the chemical producer’s clear focus to return most of its income back to investors in the form of hefty dividends and share buybacks. According to the Midland, MI-based manufacturer’s presentation to investors, Dow plans to pay out 65% of its net income to shareholders each year.
The company plans to achieve that goal by spending less on new factories and by adopting a more focused approach to its target markets after cutting down the number of its business units to six from 15. Plastics and packaging is now Dow’s largest business, accounting for about half of revenue and earnings, with operations in 31 countries.
Its stock currently pays $0.7 dividend a share, with an annual yield of about 5.27%. With the targeted payout ratio of 45% of the company’s net operating income, that dividend is quite conservative and potentially has more room to grow as the group cuts costs and takes advantage of its leading market position in the global plastic business.
That said, investors should be aware that plastic, being a derivative of oil, is a highly cyclical business where demand and supply is closely tied to the global economic growth and other macro influences. After rising about 7% this year, shares closed on Friday at $53.28.
2. Exxon Mobil
One of America’s energy “supermajors,” Exxon Mobil Corp (NYSE:XOM) certainly fits the “Dogs of the Dow” strategy for 2020 after its stock failed to sustain its early rally this year and underperformed the market.
The company has impressive scale in everything from drilling to refining to extraction in the U.S. shale region. And while the stock is unlikely to produce massive gains for investors, it remains a top pick for long-term energy bulls. Shares, which have inched up just 1% since the beginning of 2019, closed Friday's session at $69.23.
The multinational oil and gas giant is in the middle of investing billions of dollars to improve its growth, diverging from other large producers that are trying to stabilize their shares by cutting back on major spending.
Exxon's CEO, Darren Woods, believes the oil industry needs a significant injection of fresh investment to meet the new challenges it faces and has embarked on a $230 billion plan to revitalize the company, targeting drilling opportunities around the world.
XOM pays a quarterly dividend of $0.87 a share, with a yield touching 5%. But buying the stock means you’re betting that a strong recovery in oil prices will brighten the outlook of big oil companies next year. With the U.S. and China coming closer to signing a trade deal, the chances of that outcome have certainly increased.
3. International Business Machines
The century-old tech giant, International Business Machines (NYSE:IBM), has been hovering at a crossroad for many years. Big Blue, as it's affectionately called, is struggling as technology and consumer preferences rapidly evolve, depriving this tech sector legacy company of its main revenue sources.
Its sales peaked in 2011 and free cash flows did the same a year later. Chief Executive Officer Ginni Rometty's strategies to refocus IBM’s business on the latest technologies, such as the cloud and artificial intelligence, helped bring about a significant transformation of the company.
During this period, IBM exited some markets, invested in cloud data centers and bought a number of companies to boost sales, bolster technology offerings and add troves of data to help train artificial intelligence (AI) algorithms.
Though IBM has so far been slow to capture a leading market share in new areas of the digital economy, such as cloud computing, the company’s recent $34-billion purchase of Red Hat could prove a game-changer. This acquisition has added a relatively high-margin software business to IBM’s stable of offerings, especially led by the company’s hybrid cloud services to corporate customers.
The stock has been slowly responding to these efforts, rising 18% this year to $134.21 at Friday's close.
Despite the recent upsurge, IBM stock still remains about 38% down from its record high in 2013, testing the patience of the company’s buy-and-hold investors. Analysts' average price target for this stock is $148.3 for the next 12 months, the lowest being at $120, the highest at $173. The company pays $1.62 a share quarterly dividend, yielding about 4.8%.
Bottom Line
If you are on the hunt for bargains, "Dogs of the Dow" is certainly a strategy worth considering. The above three stocks from the group are our recommended stocks for buy-and-hold investors who are interested in income opportunities.