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The top ten dividend paying stocks in the DJIA make up the Dogs of the Dow for 2020. An investment strategy that in theory takes out of much the market risk while delivering higher yields. Not always the case as we saw with GE collapsing two years ago. That is the Risk

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What is the Dogs of The Dow Theory

The theory was popularized by Michael B. O'Higgins in 1991. The basis of the theory is the combination of dividend income strength and a blue chip companies lead to a combination of price appreciation and income return through a dividends. The risk however comes from the fact their high dividend yields are from stocks that have fallen out of favor. The theory is that the these stocks are oversold and will rebound faster than any other stock when the business cycle changes.

If all goes well the investor will achieve higher capital appreciation over the past one-year period  all the while collecting a higher yield. From 1957 to 2003, the Dogs outperformed the Dow by about 3%, averaging an annual return of 14.3% compared to 11% for the Dow. The performance between 1973 and 1996 was even more impressive, as the Dogs returned 20.3% annually, while the Dow produced a 15.8% return.

For comparsion the yield on the 10-year Treasury was around 2.686% at the time of the stock market close Monday, December 31 2018. The 30-year Treasury's long bond  was yielding 3.02%.

The 2020 Dogs of The Dow

The top ten highest yielding Dow stocks as of the close on December 31, 2019 are the official 2020 Dogs of the Dow.

Of these ten Dow stocks, the five stocks with the lowest closing price are known as the 2020 Small Dogs of the Dow.

The Dogs to buy in 2020 and their stock dividend yield are:

  1. Exxon Mobil (XOM), 5,16%
  2. Dow (DOW), 5.12%
  3. International Business Machines (IBM),4.95%
  4. Chevron (CVX), 4.18%
  5. Verizon (VZ), 4.03%
  6. Pfizer (PFE), 3.88%
  7. 3M (MMM), 3.436%
  8. Walgreens Boots Alliance (WBA), 3.10%
  9. Cisco Systems (CSCO), 2.92%
  10. Coca-Cola (KO), 2.89%

Of note there are only eight Dow components with a dividend yield over 3% as 2020 began. Another factor is that Dow Inc. (DOW) is the result of DowDuPont and does has a lack of historical data. For many analysts there are two “Dogs of the Dow” that will be removed in 2020 as they do not have a dividend yield above 3%. Cisco Systems and Coca Cola.

To determine risk it is important to factor in the manic nature of the past quarters stock moves, there has been little downside market pressure.  This has effectively made it nigh impossible for four or five lowest priced high-yield Dow stocks to become fair-priced with their annual yield meeting or exceeding their single share prices by year's end.

ExxonMobil (XOM) begins 2020 with a dividend yield of 5.16%.

Dow (DOW) begins 2020 with a dividend yield of 5.12%.

Dow Inc. was spun off in April and is off 0.1% for the year.  Dow Inc., DuPont (DD) and Corteva (CTVA) came from a three-way split of DowDuPont, which formed in 2017 when Dow Chemical and DuPont merged. Dow Inc. makes commodity chemicals, DuPont makes specialty chemicals, and Corteva makes agricultural chemicals. An oversupply issue has hit the chemicals industry this year. Trade and geopolitical headwinds have also weighed on industrial companies broadly.

International Business Machines (IBM) begins 2020 with a dividend yield of 4.95%.

Chevron (CVX) begins 2020 with a dividend yield of 4.18%.

Verizon (VZ) begins 2020 with a dividend yield of 4.03%.

Pfizer (PFE) begins 2020 with a dividend of 3.88%.

Pfizer earnings slowed and then fell in the latest two quarters. Pfizer's shares took a massive hit in July and August amid news of the merger between generic-drug maker Mylan (MYL) and Pfizer's own generics unit, Upjohn. In November, Pfizer announced the new company will be called Viatris. The new name will be effective upon closing of the combination, set to occur in mid-2020. The two companies will continue to operate as independent organizations until close.

3M Company (MMM) ibegins 2020 with a dividend yield of 3.43%.

 

The 2019 Dogs of The Dow

The Dogs of the Dow beat the Dow Jones Industrial Average by more than 1 percentage point a year on average through the decade. The Dogs, in fact, only trailed the broader index three years out of 10. The Dogs of the Dow had earned almost 15% a year on average, better than the 13.4% return of the Dow and the 13.5% of the S&P 500 over that span.

The.2019 Dogs total return for the Dogs was 18.8% with a beginning yield of 3.6%. The gain in the Dogs (average price gain for the 10 stocks): 15.3%

  • Highest-yielding Dogs: IBM, Exxon
  • Lowest-yielding: Cisco, Merck (MRK)

Where we started in 2019:

International Business Machines Corp. IBM

  • Dividend Yield 5.56%

IBM has been benefiting from improving operating efficiency, cost cutting and a lower share count from stock buybacks. IBM has been improving position in the cloud, security and analytics domains dominated by Amazon and Microsoft. IBM at the end of 2018 has a dividend yield of 5.56%, higher than the industry average of 3.49% and higher than it's five-year average dividend yield of 3.31%. Risks include the integration of the recent buy of Red Hat, a declining IT business and a new CEO. IBM shares were down under $114 heading into year's end, down from a 52-week high of $171.13. IBM was last seen down 26% for the year.

ExxonMobil Corporation XOM

  • Dividend Yield 4.81%

Exxon has a leading position in the energy industry through oil, natural gas and chemicals with horizontal and vertical integration through the diversity of its asset base and geographical footprint. XOM has a stable cash position with a conservative balance sheet. ExxonMobil has a dividend yield of 4.81% compared with the industry average of 3.49% andhas a five-year average dividend yield of 3.42%. Risks include oil and natural gas prices and the trade war.

Verizon Communications Inc. VZ

  • Dividend Yield 4.36%

The shift to 5G is seen as boon to companies like Verizon  with traction in the wireless business as on online content delivery, mobile video and online advertising should drive growth. Verizon has a dividend yield of 4.36%, higher than the industry average and a five-year average dividend yield of 4.57%. The risks include 5G and content is saturated in a weakening economy. With AT&T out of the Dow it gets much of the technology investment, further to that Verizon acquired Yahoo and AOL and branded them under Oath, this business model is more straight forward than AT&T with DirecTV and Time Warner. Verizon was one of the few stocks that gained in the Dow the past year, up more than 4% in 2018  

Chevron Corporation CVX

  • Dividend Yield 4.12%

Chevron has been boosted by surging oil and gas production and higher realizations, however crude oil and gasoline prices collapsed in the last quarter of 2018. Natural gas prices also collapsed in the last week of 2018.  With everything being equal CVX existing oil and gas development project pipeline are well positioned for global growth, particularly in LNG. Chevron has a dividend yield of 4.12%, compared to the industry average of 3.49% and a five-year average dividend yield of 3.95%. The risk here is oil and gas prices and the trade war.

Pfizer PFE

  • Dividend Yield 3.35%

Pfizer had the highest yield for drug and health stocks at the end of 2018 at 3.35% dividend yield and the stock was up better than 18% in 2018.

The Coca-Cola Company KO

  • Dividend Yield 3.31%

Coca Cola  strategy of introducing new products along with shifting successful brands globally is aiding performance is both a strength and a weakness. Warren Buffett touts KO as a core holding because of the yield and global presence. Coca-Cola has a dividend yield of 3.31%, higher than the industry average and a five-year average dividend yield of 3.18%.

JPMorgan Chase & Co. JPM

  • Dividend Yield 3.30%

JPM likes to hold itself as the king of U.S. banks, had a 3.30% yield and after that huge run up on tax cuts and banking hopes its shares were down over 9%  in 2018.

Procter & Gamble PG

  • Dividend Yield3.15%

Cisco Systems CSCO

  • Dividend Yield 3.10%

Merck & Co. MRK

  • Dividend Yield 2.92%

A Decade of Dogs of The Dow Returns

2019

  • Total return: 18.8%
  • Beginning yield: 3.6%
  • Gain in the Dogs (average price gain for the 10 stocks): 15.3%
  • Highest-yielding Dogs: IBM, Exxon
  • Lowest-yielding: Cisco, Merck (MRK)

2018

  • Total return: -1.4%
  • Beginning yield: 3.4%
  • Loss in the Dogs: 4.8%
  • Highest-yielding Dogs: Verizon Communications (VZ), IBM
  • Lowest-yielding: Procter & Gamble (PG), General Electric (GE)

2017

  • Total return: 24.5%
  • Beginning yield: 3.2%
  • Gain in the Dogs: 21.7%
  • Highest-yielding Dogs: Verizon, Pfizer
  • Lowest-yielding: Caterpillar, Merck

2016

  • Total return: 19.6%
  • Beginning yield: 3.4%
  • Gain in the Dogs: 16.2%
  • Highest-yielding Dogs: Verizon, Chevron
  • Lowest-yielding: Walmart (WMT), Cisco

2015

  • Total return: 2.7%
  • Beginning yield: 4.0%
  • Loss in the Dogs: 1.2%
  • Highest-yielding Dogs: AT&T (T), Verizon
  • Lowest-yielding: Exxon, Coca-Cola

2014

  • Total return: 10.6%
  • Beginning yield: 3.6%
  • Gain in the Dogs: 7.1%
  • Highest-yielding Dogs: AT&T, Verizon
  • Lowest-yielding: Cisco, Microsoft

2013

  • Total return: 33.7%
  • Beginning yield: 3.4%
  • Gain in the Dogs: 30.3%
  • Highest-yielding Dogs: AT&T, Verizon
  • Lowest-yielding: McDonald’s (MCD), Johnson & Johnson (JNJ)

2012

  • Total return: 9.6%
  • Beginning yield: 3.9%
  • Gain in the Dogs: 5.7%
  • Highest-yielding Dogs: AT&T, Verizon
  • Lowest-yielding: Procter & Gamble, Kraft (now Kraft Heinz )

2011

  • Total return: 16.1%
  • Beginning yield: 3.8%
  • Gain in the Dogs: 12.2%
  • Highest-yielding Dogs: AT&T, Verizon
  • Lowest-yielding: McDonalds, Chevron

2010

  • Total return: 18.9%
  • Beginning yield: 4.0%
  • Gain in the Dogs: 14.9%
  • Highest-yielding dogs: AT&T, Verizon
  • Lowest-yielding: Home Depot (HD), Boeing (BA)

From the TradersCommunity Research Desk

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