The Dogs of the Dow theory was popularized by investment manager Michael B. O’Higgins in his 1991 book Beating the Dow.
He proposed an investor at the beginning of the year could buy the 10 highest-yielding Dow Jones Industrial Average components in equal amounts.
Hold them until the end of the year. Do the same thing the following year, and so on.
Since 2000, this strategy has posted a decent average annual return of 8.7 per cent.
But the income and value Dogs of the Dow approach has underperformed the index the last four years.
Maybe that streak is broken this year.
Here now are the top five Dow dogs for 2022.
by Aaron Levitt, Kiplinger
O’Higgins’ proposed that Dow Jones firms with high dividends relative to their stock price in the index would be near the bottom of their business cycle and represent bargains compared to components with lower dividend yields.
The Dow Jones has long been considered one of the leading stock-market gauges of America’s economy.
While the S&P 500 has more components and is more diversified, the Dow still covers most sectors.
Not to mention, its components are extremely liquid and there are reams of research available on all 30.
Analysts have proposed that the shift to growth investing has hurt the strategy’s performance; but with value stocks predicted to regain their mojo, the Dogs could again have their day.
- Sector: Materials
- Market value: $42.0 billion
- Dividend yield: 4.9%
Dow has had a wild and transformative few years that saw it spin off assets before merging with rival DuPont (DD), then the chemical giant split into three separate firms.
The remaining Dow contains the materials sciences chemicals, including adhesives, polyurethanes, silicones, resins and waxes, among others.
Like most other materials stocks, Dow struggled right alongside the broader economy during the COVID recession.
For instance, during Q3 2020, the company lost 4 cents per share on $9.7 billion in sales. By Q3 2021, Dow had recovered considerably, posting $2.23 per share in earnings on $14.8 billion in revenues.
The omicron and future variants could throw more hurdles at the Dow recovery, but in general, a growing global economy should mean continued growth in demand for Dow’s products.
You can buy into that recovery on the cheap through Dow. Shares trade at a svelte nine times future earnings and yield nearly 5% at today’s prices.
That’s roughly four times the income you’ll pull from the broader market, and at a much better valuation. A fair dividend payout ratio of 45% of earnings leaves Dow ample room to raise that payout further.
- Sector: Communication services
- Market value: $215.1 billion
- Dividend yield: 4.9%
Verizon (VZ, $51.96) spent the last few years trying to build out a communications and media empire.
Wireless communication has become a commodity; there isn’t much difference between carriers, plans or offerings at this point.
The U.S. market is saturated. The major carriers can’t rely on their legacy businesses for growth.
But Verizon’s ventures, which included buying Yahoo! And other media properties, simply didn’t pan out.
Several write-offs later, and VZ is just getting back to basics: improving its giant network and providing services that utilize said network.
The 5G transformation is a major tailwind for Verizon. It’s not just consumer devices; smart vehicles, the Internet of Things and other applications will be a big driver for its network.
Also, Verizon has started to transition toward more enterprise customers, which includes fleet management software and applications to data security. These should also provide a runway for growth.
A forward P/E under 10 and a nearly 5% dividend, meanwhile, provide some of the best features of the Dogs of the Dow.
International Business Machines
- Sector: Technology
- Market value: $119.9 billion
- Dividend yield: 4.9%
International Business Machines (IBM, $133.66) has been nothing short of a disappointment in recent years.
Big Blue has struggled to remain relevant in the age of cloud computing while rivals chipped away market share.
At one point, the firm recorded 22 consecutive quarters of declining revenue, then restarted that streak shortly after breaking it.
Even including dividends, IBM shares returned just 1% between 2017 and 2021.
But IBM might finally be getting itself together.
Its 2019 purchases of open-source software firm Red Hat boosted the company’s operations.
Fast-forward to 2021, and the company cut loose some dead weight, spinning off its legacy IT infrastructure services as Kyndryl (KD). A now leaner, meaner IBM is focused once again on growth.
We saw signs of this in the company’s third quarter, where overall cloud revenues grew 14% year-over-year.
It’ll still be a while before IBM can report its post-separation numbers, but analysts are generally expecting IBM to start heading in the right direction once again.
Better still: IBM didn’t give away any of the dividend game with Kyndryl.
International Business Machines remains a Dividend Aristocrat whose 4.9% yield is among the best of 2022’s Dogs of the Dow.
- Sector: Energy
- Market value: $226.2 billion
- Dividend yield: 4.6%
COVID was downright miserable for the energy sector – even integrated oil-and-gas giants such as Chevron (CVX, $117.35).
However, while numerous companies closed, and many more were forced to cut jobs, slash capital expenditures and pull back on their dividends, Chevron managed to keep its dividend running and even used an all-stock deal to acquire Noble Energy.
Chevron’s acquisition of Noble at fire-sale prices boosted its overall presence in low-cost fields in the Permian Basin, allowing the company to better leverage a rebound in energy prices, which came in spades in 2021.
Energy stocks of all sorts went bananas in 2021, making it the S&P 500’s top sector. Chevron returned 46% amid a complete rebound in its operations. For instance, its third quarter saw Chevron earn $6.1 billion versus the $207 million it lost in the year-ago quarter.
However, despite its massive 2021 move, CVX stock yet again finds itself among the Dogs of the Dow.
Chevron’s 4.6% current yield isn’t as generous as the 6% or so it offered at this same time last year, but it’s still one of the top yields in the Dow.
Meanwhile, it’s value-priced at just 12 times earnings estimates.
Walgreens Boots Alliance
- Sector: Consumer staples
- Market value: $45.2 billion
- Dividend yield: 3.7%
Walgreens Boots Alliance (WBA, $52.16) wasn’t the COVID winner you might have thought.
COVID prompted a shift in the company’s sales mix to lower-margin items, and it dragged heavily on foot traffic in the company’s Boots U.K. stores.
So, like many other retailers, an escape from the pandemic should help Walgreens, which used COVID as an opportunity to cut nearly $2 billion in costs from its operations.
Walgreens has been opening branded primary-care clinics with VillageMD, who staffs these locations with physicians, allowing them to cater to more than ear infections and sniffles.
Walgreens plans to open 1,000 of these clinics at its stores by 2027.
Also in play is the potential divestiture of its Boots business; several reports in December said Walgreens was mulling the move.
With foot traffic on the rebound and new avenues for growth opening up, WBA could be a productive Dow Dog. A forward P/E of around 10 doesn’t hurt, either.
All images: Getty Images
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