4 High-Yielding Dow Stocks: Are They Worth Buying?
A winning strategy over the years has been what is called the “dogs of the Dow” strategy, whereby investors buy the highest-yielding stocks in the Dow Jones Industrial Average at the beginning of each year and rebalance/reallocate at the beginning of the following year. The idea behind the strategy is that stocks in the Dow are generally large blue chip companies that have consistent earnings power and a competitive advantage. The highest-yielding stocks are also, in many cases, the worst performers, and so the approach is a contrarian one.
While this may not be a completely logical way to invest, it is a strategy that makes sense, and while I don’t think it should be followed religiously, investors should consider purchasing shares in the higher-yielding stocks in the Dow. The following four stocks are the highest yielding in the Dow, and investors looking for income from lower-risk large-cap stocks should consider taking positions in them.
1 and 2. AT&T and Verizon
The two highest-yielding stocks in the Dow are AT&T (NYSE:T) and Verizon (NYSE:VZ), the two telecommunications companies in the index. These companies have extremely stable businesses that consistently generate cash flow: people who purchase telecommunication plans make regular monthly payments to their service providers. This makes AT&T and Verizon consistent performers. However, both stocks have underperformed in the past year. Investors gravitated toward growth stocks rather than safe dividend payers. Furthermore, while these companies have steady cash flow, they also have a lot of expenses — both companies and their smaller competitors need to make sure that they have the best networks, and this means that they are constantly upgrading them.
But all of this negativity has led to what appears to be an opportunity in both stocks. They trade with low double-digit P/E ratios despite showing signs of growth. Furthermore, they pay very high yields in a market where interest rates are low and high quality dividends are difficult to find. AT&T pays 5.3 percent and Verizon pays 4.6 percent. Either or both of these stocks would make an excellent addition to a value and income-oriented portfolio.
After AT&T and Verizon, the dividend opportunities in the Dow drop off considerably. The next highest-yielding companies yield 3.4 percent. This is somewhat low for investors looking to construct a high-yielding portfolio, but at the same time, with the S&P 500 yielding less than 2 percent in the aggregate, 3.4 percent is respectable.
The first of these companies is Intel (NASDAQ:INTC), which is the largest computer chip manufacturer in the world. The company has very stable income and strong profit margins. For this reason, Intel is one of the best cash-flow generators in the Dow — or in any other index, for that matter. In the most recent quarter, the company reported a slight income decline, which reflected lower margins.
Nevertheless, the company earned more than enough to continue to pay its dividend, and it should have no trouble raising it, although it didn’t in 2013. With potential weakness coming into the stock market due to fears over a political conflict in the Ukraine, I think investors should consider a position in Intel at around $24 per share versus its current share price of $26.
The other 3.4-percent yielder in the Dow is one of the world’s largest pharmaceutical companies: Pfizer (NYSE:PFE). The company had a long track record of raising its dividend until it cut it during the financial crisis. The company has also faced several patent cliffs, in which drugs that it produced and owned patents on (e.g., Viagra) went off patent. As a result, the company has struggled. But these concerns are well known, and I think they are largely behind the company. It still has several consistent revenue streams from patented drugs, and it is well positioned to conduct additional research in order to grow its pipeline.
Pfizer’s valuation is a little rich, at 19 times earnings, but it is capable of paying its 3.4 percent dividend. It has also been returning capital to shareholders through an aggressive share repurchase program that has reduced the total number of shares outstanding by over 20 percent in the past few years. While this is a positive, it has pushed up Pfizer shares, and it appears that they are pulling back now. I think investors looking to take a longer-term position in this leading drug company should wait for a 10 percent correction to $27 per share.
Disclosure: Ben Kramer-Miller has no position in any of the stocks mentioned in this article.
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