Introducing 2019’s Dogs of the Dow


The Dogs of the Dow strategy is pretty simple, which is why it appeals to so many investors. The idea is that at the start of each year investors buy an equal dollar weighted amount of the ten stocks in the Dow Jones with the highest dividend yields and hold those stocks through the course of the year regardless of their individual performance.

By buying the stock’s with the highest yield, the idea is that the securities are trading below their fair value and should outperform the overall market as traders push the stock’s higher. Last year the strategy got off to a rocky start during the first half of the year, but by year’s end it was successful, with the group gaining 2.6% (including dividends) while the overall Dow Jones lost 5.6%.

This year’s group of stocks is almost identical to last year’s, with one exception. General Electric fell out of the group after the struggling conglomerate slashed its quarterly dividend from 12 cents to just a penny, and its place JP Morgan has joined this year’s group.

Given the fact that GE was last year’s worst performer and fell 53%, it is a good thing that the stock is not among this year’s stocks.

Let’s take a look at each of this year’s stocks and how they have fared in recent months.

Note: Please note that all return numbers stated from Dogs of the Dow stocks in 2018 include dividend payments made during the year.

International Business Machines and Exxon Mobil

International Business Machines (IBM) and Exxon Mobil (XOM) have the two highest yields in the Dow Jones at 5.1% and 4.44% respectively. In 2018 IBM dropped 19.2% while XOM ended the year down 12%.

IBM has struggled in recent years as the company failed to grow its cloud and artificial intelligence businesses. Understanding a need to better compete in the cloud sector the company agreed to acquire RedHat for $34 billion in 2018. Questions remain over whether or not IBM overpaid for RedHat, and it will take years before the company is able to recoup the cost, but the acquisition does put IBM in a leadership role in cloud computing which is currently the fastest growing area in tech. IBM is trading at $121.20 with an average price target of $162.90.

Exxon Mobil showed strength last summer as oil prices rose, but the stock cooled off in the fourth quarter and moved strongly lower as the overall market corrected in December. There is a growing fear over a possible global recession on the horizon which would have a material impact on oil demand. The world is producing more oil than it needs as it is, so any economic slowdowns would create a situation where there is even less demand for the oversupply which in turn would drive oil prices sharply lower. The ongoing trade war between the U.S. and China are a concern, as is Brexit. Both could hurt global economies if not handled correctly, but if we see positive outcomes for these situations in 2019 oil stocks should recover nicely. XOM is trading at $71.44 with an average price target of $87.83.

Verizon and Chevron

Telecom giant Verizon (VZ) and oil and gas company Chevron (CVX) make the list again this year with dividend yields of 4.1% and 4.1% respectively.

Verizon was strong in 2018 but the stock did sell off in December in sympathy to the overall market correction. The company has done a good job growing earnings in a saturated market, with earnings up 6.9% on average over the last five years and analysts expect to see profits up 5.9% per annum over the next five years. VZ was one of last year’s top performers with a 14.7% gain, and the stock is well positioned for another strong year. The company will report its first earnings for the year on January 29 with the consensus calling for profits of $1.09, up from $0.86 during the same period last year. VZ trades at less than 8 times earnings, so there is certainly value in the stock at this point. VZ is trading at $57.92 with an average price target of $58.50.

Chevron traded lower in December along with the overall market and falling oil prices and ended the year down 6.9%. The stock has already started to recover and has made back about half of its December losses. There is a lot of uncertainty in oil stocks with a global oversupply and fears over the possibility of a global recession and its impact on oil demand. Chevron will report earnings on February 1, and traders will need to see a strong set of numbers for the stock to build on its recent gains. CVX is trading at $112.19 with an average price target of $140.55.

Pfizer and Coca-Cola

Coca-Cola (KO) makes the list with a dividend yield of 3.27% and Pfizer (PFE) is right behind it with a current yield of 3.16%. Both stocks were in last year’s group and performed well. Pfizer was a strong outperformer with the position rising 27.7% while KO enjoyed a respectable 8.5% gain.

KO showed a lot of strength in the second half of the year before selling off with the overall market in December. The stock has found support as overall market conditions have improved, but the stock has yet to make a meaningful recovery. One thing holding the stock back at this point is its valuation. KO trades at 72 times earnings and 21.4 times forward earnings. Earnings are expected to rise 9.4% for the current year, which should help keep strength under the stock, but the company is going to need to post even stronger gains for the stock to really move to the upside. The company will report earnings on February 14 with the consensus calling for earnings of $0.43 per share, up from $0.39 during the same period last year. KO trades at $47.48 with an average price target of $51.00.

Pfizer avoided much of the December selloff, but the stock has been stuck in a sideways trend near its all0time high for the last four months. The stock trades at less than 11 times earnings, so valuation is not a huge concern, but earnings growth is slowing which could keep a ceiling on the stock unless the company is able to post better than expected results in the next few quarters. Earnings are expected to rise 13.2% during the current year but only 2.7% next year. PFE trades at $42.85 with an average price target of $45, so analysts do see some upside, but for traders to enjoy the level of success they enjoyed in 2018 the market will need to see some big positive earnings surprises from the company during the year. PFE will next report on January 29 with the consensus calling for earnings of $0.63 per share, up a penny from the same period last year.

Procter & Gamble and Cisco Systems

Consumer goods maker Procter & Gamble (PG) is on the list with a yield of 3.1% and Cisco Systems (CSCO) has a current year of 2.96%. Both stocks outperformed in 2018 and remain attractive as we start 2019. PG appreciated 5.8% in 2018 while CSCO ended the year up 19.2%.

Procter & Gamble had a rough start to 2018 before the stock took off over the summer and traded up to an all-time high in December before selling off in December with the overall market. PG quickly found support and has recovered as the overall market has firmed. PG remains reasonably priced with a forward P/E of 19 and forecast average annual earnings growth of 6.7% over the next five years. Procter & Gamble will report its fourth-quarter numbers on January 23 with the consensus calling for earnings of $1.21 for the quarter, up from $1.19 during the same period last year. The stock is currently trading at $92.04 with an average price target of $93.96.

Cisco had a strong year in 2018 despite a big sell off in December with the overall market. Fears over a global economic slowdown hurt the tech sector which had been the driving catalyst of the bull market in recent years. Cisco has found support and started to erase some of its December losses and the stock should continue to show strength as long as the overall market does not encounter another correction ahead of the company’s next quarterly report on February 13. Analysts expect fiscal Q2 earnings of 65 cents per share, up two pennies from the same period last year. Analysts remain bullish on the stock, with a $52.29 price target versus its current price of $44.00. Earnings are expected to climb 16.9% during the current year, and by and average 9.2% annually over the next five years.

Merck and JP Morgan Chase

The last two stocks in this year’s group are Merck (MRK) and Dogs of the Dow newcomer JP Morgan Chase (JPM). The stock offer yields of 2.6% and 2.46%, respectively.

Drug maker Merck was the group’s top performer in 2018, boasting an impressive 41.6% gain during the year. The stock fueled by a string of better than expected earnings reports with profits rising each quarter year over year. Merck held up well during the December market correction, and the stock remains near its 52-week high. Analysts see additional upside in MRK with an average price target of $80.69 versus its current price of $74.47. Merck has a favorable valuation with a forward P/E of 15.8 and analysts expect the company to grow earnings by 9.5% per annum over the next five years. Merck will report its first set of quarterly numbers for the year on February 1. Analysts expect Q4 earnings of $1.03, up from $0.98 during the same period last year.

JP Morgan Chase is the sole newcomer to the group this year, replacing General Electric (GE) which was forced to slash its dividend in 2018. JP Morgan has already reported earnings this year, and despite missing on the top and bottom line the market drove the stock higher. Lower trading volumes were to blame as a lot of traders remained on the sidelines during the market correction. The market appears to expect trading volumes to increase now that some stability has returned to the market and are taking the long-term approach to its view on the stock. The stock is currently trading at $101.49 with an average price target of $119.25, but we may see some analysts adjust their target lower following the wide earnings miss. For now the stock is holding up well considering Q4 earnings of $1.98 were well below the $2.21 consensus, which is a strong indicator that the market will allow the stock to move higher as long as the overall market does not move lower as we move deeper into the earnings season. The stock has a low forward P/E of 10.2, so value hunters are unlikely to let shares slide too much even if sentiment starts to weaken.

Michael Fowlkes

Michael Fowlkes

Michael Fowlkes is a financial writer who has been with the Fresh Brewed Media family since 2004. Over the course of his tenure with Fresh Brewed Media, he has worn many hats, including portfolio manager, options analyst, and writer. Michael received his undergraduate degree from Virginia Tech in Accounting and got his start in finance working as a stock trader for six years at Chase Investment Counsel in Charlottesville, Va.

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