4 Highest Yielding 'Dogs of the Dow'
Michael is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The US stock markets have had a nice “January Effect” -- you know, the bull run that supposedly sets the tone for the rest of the year. However, volume is seriously lacking in this move and the pundits have noticed. Expectations of continued growth for US stocks are being tempered by the reality of 2012. Global growth is slowing -- Europe is expected to retract in 2012, led by Greece and Portugal whose economies are each expected to decline by 3% or more this year. China and Asia are also experiencing slowing, economic conditions that will exacerbate the European crisis and our own stagnant expectations.
The Dogs of the Dow made big headlines at the turn of the year for good reason. These solid, high yielding stocks offer safety and returns in an unstable market environment. Established companies are a safe haven because we know they can and will produce results. The question facing the markets now is “when will true growth return”. Some corporations are reporting positive results but closer scrutiny reveals a different story. Take Bank of America (BAC) for example. They reported profits in the third and fourth quarter of 2011 but the numbers were driven by sales of a Chinese bank, not actual business.
The top four Dow stocks by yield are solid companies with realistic expectations for 2012. Together, they average over 4% dividend yield, a number that can easily tip the decision on buy or not buy.
AT&T (NYSE: T) is the top yielding stock of the Dow. The communications giant recently raised the dividend by 2.3% to an annualized $1.76/ share. The share makes the current yield 5.9%, a level that would worry me from a lesser company. The board stated in the release that the move reflects the strong financial position of the company. Since the economic downturn began in late 2008 AT&T has been able to increase cash flows, pay down debt and invest billions to support increased customer use.
AT&T is currently trading around $30.50, near the top of its one year trading range. The technical indicators support strength, something missing from the general market. Momentum is bullish in the long term as well and is supported by an up trending stochastic. AT&T is undervalued at 13 times earnings, especially with the dividend paying what it is. Institutional investment is over 50% and will grow as new money comes in for the dividend. AT&T will go to at least $32.50.
Verizon (NYSE: VZ) is next on the list, yielding 5.2%. Third quarter earnings, released in October 2011, were good. The company earned $0.49/share vs $0.23 in the same period of the previous year. This is an improvement of 113%. The gain was made on the strength of its wireless business, increased cash flow and growth of strategic services. In the statement, Lowell McAdam, president and CEO, said that the company “emerges from the third quarter in a strong position to accelerate growth”. He was expecting to see the company grow revenue in 2012. The fourth quarter earnings release is scheduled for 8:30 am Jan. 24.
Verizon is currently trading around $39 and looking to bounce up from its 30 day moving average. The bearish activity seen since the beginning of the year is subsiding and suggests at least a retest of the recent highs near $41. The long term chart is strong and the move upward could take it all the way to 5 year highs over $60.
Merck and Co. (NYSE: MRK) has been impressing the market this year. The third quarter earnings release beat Wall Street estimates and expectations for the fourth quarter are high as well. In fact, the company raised full year guidance. The release cited 8% global sales growth of pharmaceuticals and animal health sales. It also cited double digit sales growth of its five top selling medicines including Januvia, Gardasil and Singulair. The strong growth in sales and high dividend yield make this stock attractive. Merck is currently trading around $39 and yielding 4.3%.
I think Merck is still grossly undervalued. The p/e is currently around 10 and could easily go to 14 or 16. The stock has been trending strongly upward since August and short term indicators are consistent with a continued move upward. On the long term charts the stock is facing resistance around $40 but there I think it will break on through. The stock is a gem. It is a solid, well known company with proven strength in sales and pays a great dividend.
Pfizer's (NYSE: PFE) long term chart is a textbook flag. The five year chart shows a company that has been trending up for over three years. PFE has slowly been chipping away at resistance while building a base of support. Third quarter revenues were 7% higher than in the previous year, and 2% higher year to date of 2010. In the report, gains are attributed to operational growth and favorable foreign exchange rates. US sales were 3% lower but up internationally by 15%.
Pfizer is looking very bullish long term. Momentum is strong and should carry this stock upward. The short term chart shows me a strongly trending market with room to move up. PFE is consolidating around $21.90 and slowly coming back to its 30 moving average. The sideways move should continue until Jan. 31, when the fourth quarter conference call is scheduled. At that time I expect to see PFE begin its move up to $27.50.
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