Dogs of the Dow Fetch Big Rewards
John is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The Dogs of the Dow Shelter is a place folks visit this time of year hoping to fall in love with something really special that others have given up on, ignored, or neglected.
These lovable Dogs feature attributes Value Investors wanna snuggle up with and hug: the Dogs are usually big in size, have a distinct pedigree of financial success, and their prices are marked down enough to assure each Dog ultimately finds a friendly home.
These cuddly creatures may be temporarily unloved, but they've proved to be man's (or woman's or just plain investor's) long term best friend.
Look how these puppies have performed!
3 Year 5 Year 10 Year 20 Year
Dogs of the Dow 17.09% 3.4% 6.7% 10.8%
S and P 500 Index 14.5% 2.4% 5.0% 9.6%
Fidelity Magellan 14.0% 2.3% 3.4% 8.8%
So who are this year's unloved K-9s who just keep sharing their love in the form of fat quarterly dividend payouts?
As a group I'd say they're "defensive"...dogs that tend to outperform when investors worry about macro growth.
Literally, they are the highest paying Dividend Stocks on the Dow. As they become unloved their stock prices decline--causing their Dividend rates to increase.
They're Only PRICED Like Dogs
AT&T (NYSE: T) yields 5.35% Its not your grandpa's AT&T. But grandpa would sure appreciate that 5%+ Dividend! And you won't need Dramamine to handle the Turtle-like movement from this 0.64 beta Dog. These days, Telecom Services means Smart Phones. And T is truly one of the global leaders in both the consumer and business segments. Analysts say T 's aggressive expansion of L-T-E networks likely assures strong growth in this hot category. Unfortunately, though, results are dragged down by grandpa's segment that loses money year after year: Wireline. Overall, revenues have flatlined, growing only a percent or so. This is a Yield Play with little growth factored into the stock price. On a PE basis, T fetches a market typical 14X, but a comfortably payable Junk Bond-like Dividend Yield is obviously highly supportive..
Verizon (NYSE: VZ) yields 4.63%. Like AT&T, Verizon is betting on the continued growth of the smartphone market and its strong competitive position to boost its bottom line. But VZ has a few more growth gems in its arsenal including the popular FIOS fiber optic network which gives it a strong competitive position selling lucrative Triple Play subscriptions including TV, High Speed Internet, and Phone. FIOS revenues are growing 15%. Overall VZ is growing Earnings about 7% and is on track to earn $2.46 this year And Analysts say VZ has a lead on competitors in rolling out L-T-E across America, potentially a big advantage in the cell phone wars . Like T, VZ's wireline revenues are falling. But thats not part of anyone's growth strategy.
Merck (NYSE: MRK) yields 3.86%. Merck shareholders also won't suffer from motion sickness watching this steady 0.65 beta. Business recently has flat-lined with revenues and profits on either side unchanged. Merck's been hit by key patent expirations including the popular Asthma and Allergy Drug Singulair. And Merck faces obvious challenges with recession plaqued European operations. But Merck, over the years, has been a steady performing Blue Chip with a solid Balance Sheet and the resources to survive droughts in its drug pipeline. Yet pipeline is not a problem now, especially in anemia, cancer, and hypertension . MRK's Cervical vaccine shows great promise and strong sales and it has a strong Diabetes franchise. At a PE of 12 MRK shares don't face much downside risk.
General Electric (NYSE: GE) yields 3.18%. Get the feeling we're not talking about momentum high flyers when I tell you GE may be the sexiest GROWTH story among the Dogs? GE is a leading play on alternative energy and is enjoying tail winds from growing demand for jet engines in both the US and Emerging Markets. At 15 times earnings its not dirt cheap, but is well positioned for cyclical growth in categories like Jet Engines (commercial and military) as well Energy Infrastructure. The real story for the bottom line is..GE Capital no longer drags down earnings.. it's actually returning dividends to its parent. And CEO Jeff Immelt has consistently returned capital to shareholders via dividend hikes and buybacks, with the promise to continue both trends.
Pfizer (NYSE: PFE) yields 3.47% There IS life after Lipitor! That may be the 2012 PFE Headline. Losing patent protection on a $1 billion/month blockbuster drug, the most popular of all time, was one of the greatest challenges for any business ever. But it now appears PFE's purchase of Wyeth was a brilliant stroke..assuring today's PFE is a diverse big pharma/biotech powerhouse. And it has focused on areas it deems have the most potential, including Oncology. Its spinning off its Animal Health Division in 2013. Meanwhile, PFE management has pledged a renewed commitment to enhancing shareholder value with ongoing dividend hikes and stepped up stock buybacks. Pfizer has a pristine balance sheet. And its restructuring has yielded the company about $3 billion in annual cost savings.
Ben Graham-like Pets For Your Portfolio
If there's a common thread among the Dow Dogs--they're blue chip companies deemed by Mr. Market to have unexciting near term prospects. They're built to last with strong balance sheets. But the stock prices don't discount much growth. The valuations are based on the PAST and PRESENT..not the unknown future. That's the definition of a Ben Graham value search. Think of it this way: if these stock prices freeze for the next 10 years and the Dogs never raise their Dividends again..your Dow Dog Dividend payments will be twice what you'd earn buying a 10-year Treasury. And the pleasant surprise may be..they could actually grow. These Dogs have earned loving homes in your Portfolio.
Grahdodd owns shares of General Electric Company. The Motley Fool owns shares of General Electric Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!