The Dogs of the Dow are the 10 stocks in the Dow Jones Industrial Average that are the highest yielding at the beginning of each year. Some years this gang of 10 has an outstanding year and really leads the pack. In other years, especially when momentum rules, they often trail. With energy starting to rebound and worried investors looking at the worst start of the year in decades, investors seeking value have been looking at the dogs.
An interesting chart from Jefferies shows the Dogs of the Dow versus the other Dow members not in the group. So far this year, based on changes in yields, the dogs are doing much better, as their yields have not widened out near as much as the other 20 companies. That means the stock prices have performed better as yields go higher when a stock’s price falls.
Here we focus on the four companies that are still yielding 4% or more.
Verizon Communications
This top telecommunications company recently did away with some phone incentives. Verizon Communications Inc. (NYSE: VZ) is a global leader in delivering the digital world. Verizon Wireless operates America’s self-described most reliable wireless network, with 109.5 million retail connections nationwide. Verizon also provides converged communications, information and entertainment services over America’s most advanced fiber-optic network and delivers integrated business solutions to customers worldwide.
Wall Street has applauded Frontier’s acquisition of Verizon’s wireline operations in California, Florida and Texas, which is expected to be completed at the end of this month. Many feel that focusing on the higher margin segments at Verizon makes sense, and the sale to Frontier is a huge cash boost to the balance sheet. The company reported solid fourth-quarter numbers with earnings slightly higher than some Wall Street estimates and revenues above the street consensus too.
There was some chatter last month that Verizon was enlisting the aid of the firm’s AOL unit CEO Tim Armstrong to help with a leading role in exploring a possible bid for Yahoo assets. Verizon has not officially started any negotiations, and the rumors are just that, but the company has said in the past it is open to acquiring additional assets.
Verizon investors receive a massive 4.34% dividend. The Thomson/First Call consensus price objective is $50.33. Shares closed Wednesday at $52.12.
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Chevron
This is very solid story for investors looking to stay long the energy sector, and it is a preferred U.S. company to own now. Chevron Corp. (NYSE: CVX) is an integrated oil and gas company with worldwide operations in exploration and production, refining and marketing, transportation and petrochemicals. It sports a sizable dividend and has a solid place in the sector when it comes to natural gas. Some Wall Street analysts estimate Chevron will have a compound annual growth rate of over 5% for the next five years, and the stock trades at a modest valuation discount to some of its mega-cap peers.
Management continues to aggressively pursuing cost-saving initiatives and already has completed over 2,200 supplier engagements, with more in progress. Cost savings and improving investor sentiment may be a key as the company has struggled mightily over the past year. While many on Wall Street concede that the oil market could be oversupplied for longer than most thought, massive overseas demand and production slowdowns should help pricing the rest of the year.
The company’s Permian Basin assets are a goldmine and that the Australian LNG business will transition from a yearly $8 billion capital consumption drag to a $2 billion to $3 billion contributor. Combined with the much lower overall capital spending for the 2016 to 2018 period, the company is poised to not only hang around, but end the sector slump in a much better position.
Chevron investors receive a 4.91% dividend. The consensus price target is $93.82. Shares closed on Wednesday at $87.14.
Caterpillar
This company is way out of favor, and its shares now trade at a level where the dividend is the highest in years. Caterpillar Inc. (NYSE: CAT) is the world’s leading manufacturer of construction and mining equipment, diesel and natural gas engines, industrial gas turbines and diesel-electric locomotives. The company principally operates through its three product segments — Construction Industries, Resource Industries and Energy & Transportation — and also provides financing and related services through its Financial Products segment.
In a huge cost-cutting mode for over a year now, the company recently announced it will consolidate its Electric Power and Marine & Petroleum Power divisions. Consolidating these energy operations and integrating them within Customer & Dealer Support will bring higher efficiencies and a streamlined leadership team. Last year, Caterpillar further announced plans of consolidation and layoffs of up to 10,000 employees by 2018. At the end of 2015, Caterpillar’s global workforce totaled 105,700 employees, down nearly 11% from 2013.
Any rebound in global growth will benefit this top blue chip stock. Caterpillar shares currently trade at their lowest level since the fall of 2011. Patient investors may make a ton adding this stock to a long-term growth portfolio.
Caterpillar investors receive a 4.44% dividend. The $60.38 consensus price target is lower than the most recent close of $69.38.
Pfizer
This is a top pharmaceutical stock that could be offering investors outstanding upside potential. Pfizer Inc. (NYSE: PFE) has a very strong pipeline, and being the world’s largest drug manufacturer by sales value supports the Wall Street notion that it can generate higher long-term revenues through the accelerated growth of its new drugs over the next five years.
Pfizer announced recently the details of what would be one of this year’s biggest deals, a $160 billion merger with Allergan. But the Treasury Department has said it is working on new rules for corporate tax inversions, which is potentially what the Pfizer/Allergan deal would be, and could throw wrench into the negotiations. Merrill Lynch sees 37% upside from current levels and 51% if the Allergan deal does indeed go through. Pfizer executives maintain that they don’t think government will scuttle the deal. With $3 to $5 arbitrage pressure on the stock, there is some downside protection, even if the deal does break.
Pfizer has announced that it is starting 20 clinical trials this year, and more soon after, on treatments to conquer cancer, as it also seeks to gain leadership in one of the hottest and most lucrative areas of medicine. Hedge funds seem to like the stock, as a total of 22 own it now.
Pfizer investors receive a 4.0% dividend. The consensus price target is $39.13, and shares closed Wednesday at $29.98.
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All four stocks make good sense for growth and income portfolios that can tolerate some risk. For the long haul, though, they should provide a much better avenue for total return and continue to increase dividend payouts. They also should do extremely well if all the many catalysts they have start to come in.
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