Investing

5 Dividend Dow Stocks to Buy That Might Survive a Nasty Correction

Lee Jackson

Published: January 21, 2020 7:15 am

Last Updated: January 30, 2020 11:02 am

Twenty years ago, the table was set just like it is now. Technology stocks were leading everything higher and people breathlessly plowed into the stock market for the same reason they do now. Despite valuations and fundamentals that were extended far beyond the normal multiples, and just like today, the “FOMO” (fear of missing out) was the driving force. While staying invested on a long-term basis is always the best investment strategy, the time for chasing the gigantic FANG moves may be reaching an end.

With the staying invested theme in play, we screened the 30 companies in the venerable Dow Jones industrial average looking for reasonable valuations and a somewhat defensive posture. Then we screened the candidates that made the cut against the Merrill Lynch research coverage universe to look for companies that paid dividends and were rated Buy.

We found five dividend-paying stocks that look like good selections for growth accounts with some risk appetite that are looking for total return.

Caterpillar

This large-cap leader was hit by trade worries in 2019 and is offering a very solid entry point. Caterpillar Inc. (NYSE: CAT) is the largest manufacturer and marketer of construction equipment worldwide, and it is also a leading manufacturer of diesel engines and turbines for transport and industrial applications.

With 2018 sales and revenues of more than $54 billion, Caterpillar 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 three primary segments (Construction Industries, Resource Industries and Energy & Transportation) and also provides financing and related services through its Financial Products segment.

Caterpillar shareholders receive a solid 2.80% dividend. Merrill Lynch has set a $165 price target for the shares, which compares to the Wall Street consensus target of $146.27. The stock closed Friday’s trading at $147.78 a share.

Coca-Cola

This company remains a top Warren Buffet holding and offers not only safety but also an incredibly strong worldwide brand. Coca-Cola Co. (NYSE: KO) is the world’s largest beverage company, refreshing consumers with more than 500 sparkling and still brands.

Led by Coca-Cola, one of the world’s most valuable brands, the company’s portfolio features 20 billion-dollar brands including Diet Coke, Fanta, Sprite, Coca-Cola Zero, vitaminwater, Powerade, Minute Maid, Simply, Georgia and Del Valle. Globally, it is the number one provider of sparkling beverages, ready-to-drink coffees and juices and juice drinks.

Through the world’s largest beverage distribution system, consumers in more than 200 countries enjoy Coca-Cola beverages at a rate of more than 1.9 billion servings a day. With coolers getting packed for picnics, parades and vacations you can bet that they will be stuffed with products from this iconic American company. Also remember that the company also owns 16.7% of Monster Beverage, which continues to deliver big numbers.

Coca-Cola investors receive a 2.82% dividend. The Merrill Lynch price target is $60, while the posted consensus target was last seen at $59.29. The stock closed most recently at $56.94 per share.

This remains a top Wall Street energy pick, and it is a safer long-term play for conservative investors. Exxon Mobil Corp. (NYSE: XOM) is the world’s largest international integrated oil and gas company. It explores for and produces crude oil and natural gas in the United States, Canada, South America, Europe, Africa and elsewhere.

Exxon also manufactures and markets commodity petrochemicals, including olefins, aromatics, polyethylene and polypropylene plastics, and specialty products, and it transports and sells crude oil, natural gas and petroleum products. Note that Exxon has one of the highest paid American CEOs.

The company reported better third-quarter results that did have some positive trends, and Merrill Lynch noted this at the time.

ExxonMobil’s third quarter is underlined by momentum towards a target to double cash-flow by 2025 with visible growth in exploration and production leading the way. Project execution remains strong while peer leading balance sheet allows for countercyclical investment at advantaged costs. With asset sales set to close any deficit in cash-flow, the company’s strategy clears the way for future rateable dividend growth.

Fourth-quarter results are expected on January 31.

The company raised the dividend last year by a nickel per share to $0.87, which now translates to a solid 5.08% dividend. The $100 Merrill Lynch price objective is well above the $78.24 consensus estimate. The stock closed at $68.56 on Friday.

IBM

This blue chip giant still offers investors a very solid entry point. International Business Machines Corp. (NYSE: IBM) is a leading provider of enterprise solutions, offering a broad portfolio of information technology (IT) hardware, business and IT services, and a full suite of software solutions. The company integrates its hardware products with its software and services offerings in order to provide high-value solutions.

IBM’s five major segments are: 1) Cognitive Solutions, 2) Global Business Services, 3) Technology Services & Cloud Platforms, 4) Systems and 5) Global Financing. Analysts cite the company’s potential in the public cloud as a reason for their positive outlook going forward. But note that IBM is among the big corporations with the most debt.

IBM offers shareholders a large 4.70% dividend. The Merrill Lynch price target is $170. The posted consensus target is $147.68, and the shares were last seen trading at $138.31 apiece.

Verizon

This top telecommunications stock offers tremendous value and growth potential. Verizon Communications Inc. (NYSE: VZ) is one of the largest U.S. telecom companies. It provides wireless and wireline service to retail, enterprise and wholesale customers.

The company’s wireless network serves approximately 120 million mobile connections with 115 million postpaid subscribers. Verizon’s wireline business has undergone a period of secular decline due to wireless substitution and cable competition. Verizon acquired AOL and Yahoo to create the Oath digital content platform.

Verizon also provides converged communications, information and entertainment services over America’s most advanced fiber-optic network, and it delivers integrated business solutions to customers worldwide. Furthermore, Verizon is another of the most valuable brands in the world.

Verizon investors receive an outstanding 4.09% dividend. Merrill Lynch has a $64 price objective. The consensus price target across Wall Street is $61.61, while the stock closed trading most recently at $60.13.

Note that while these companies are not necessarily the most conservative plays, they are trading at reasonable valuations and would quite possibly hold up much better in a risk-off scenario in which momentum stocks are the first to be sold. Investors could also sell covered calls out two to three months to increase total return potential.