The “Dogs of the Dow” stock-picking strategy is simple, yet effective. The basic premise is to buy the stocks with the highest dividend yields in the Dow Jones Industrial Average. At its core, the strategy calls for a mix of value and income investing.
Bargain-hunters can cherry pick the highest-yielding Dow stocks, which typically underperformed the overall average during the course of the previous year. With their low share prices and high dividend yields, the Dogs of the Dow can produce excellent returns for shareholders, if they can return to their former glory.
This year, telecom giant Verizon Communications (NYSE: VZ) is the Dow member with the highest dividend yield. Verizon dividend yield is currently at a hefty 4.5%. Verizon is likely to be the Dow’s comeback stock of 2018.
2017 in Review
One of the reasons why Verizon is the highest-yielding Dow stock, is that the company’s growth has ground to a halt. Intensifying competition in the wireless industry, particularly from low-cost under-cutters like T-Mobile (NASDAQ: TMUS), has weighed on the industry giants.
Verizon has seen higher-than-normal churn this year, and is struggling with customers flocking for cheaper plans elsewhere. In addition, Verizon’s cable business is under pressure, from the effects of “cord-cutting”. This describes an increasing trend of consumers cancelling their high-priced cable bundles, in favor of skinny bundles and over-the-top Internet streaming services like Netflix (NASDAQ: NFLX) and Hulu.
As a result, Verizon stock is down 1% year-to-date, while the S&P 500 Index is up 20% this year. This is because Verizon’s financial performance has deteriorated over the past two years. Verizon’s total revenue declined by 4% in 2016, and by another 4% over the first half of 2017.
But while Verizon is down, it’s not out. Not by a long shot. Verizon has multiple growth catalysts for 2018 and beyond. If anything, its languishing share price gives investors a good buying opportunity. Verizon trades for an attractive valuation; the Verizon dividend yield is high.
Why Verizon Is a Buy for 2018
Verizon performed poorly over the first half of the year, but performance significantly improved in the third quarter. Revenue returned to growth, with a 2.5% year-over-year increase, and beat analyst expectations by $270 million for the quarter.
The company moved to match competitors’ discounts during the middle of the year. While this decision will negatively impact margins, it helped Verizon bring back some of the customers it had lost over the first half of the year. For example, Verizon added 603,000 net retail postpaid subscribers last quarter, 486,000 of which were postpaid smartphone net adds. Verizon also added 91,000 tablet subscribers for the quarter, and 238,000 “other” subscribers, led by wearable devices.
For the full year, Verizon management expects organic revenue and earnings per share roughly even with last year, but notable improvement in wireless service revenue and equipment revenue trends. Plus, the company has a number of catalysts in the works, which means 2018 should be a much better year for Verizon shareholders.
Verizon’s biggest growth catalysts are 5G and the Internet of Things. New technologies are in the works, and Verizon’s industry-leading network is best-equipped to capitalize. 5G rollout is expected for 2018, and will be a bet step for Verizon to recapture lost subscribers. Low-priced competitors cannot match Verizon’s network quality. Once 5G is available, consumers might once again decide that Verizon is worth a higher price.
Verizon conducted 5G trials last year, has initiated pilot programs in 11 U.S. cities in 2017. Verizon states that 5G speeds are 100 times faster than current wireless technology. It estimates the total market opportunity for 5G at $12.3 trillion, by 2035. Verizon’s $3 billion acquisition of Straight Path Communications (NASDAQ: STRP) will help Verizon become the spectrum leader in 5G.
Another emerging growth catalyst is the Internet of Things, or IoT, which will power connectivity outside of just smartphones and tablets. Essentially, all devices around the home can be connected — such as household appliances— which could make our lives much easier. Imagine your refrigerator ordering milk on its own, when you’re close to running out.
Verizon has made multiple acquisitions to boost its IoT business, including the $2.5 billion acquisition of Fleetmatics and the $900 million acquisition of Telogis. Verizon’s IoT business reached $1 billion in revenue last year, with further growth in store next year and beyond.
A Value and Dividend Opportunity
Verizon stock trades for a price-to-earnings ratio of 13, which is roughly half the valuation multiple of the S&P 500 Index. The company has seen a number of challenges last year, but it remains the dominant wireless provider.
The company is a cash-flow machine, which powers its hefty dividend. The Verizon dividend yield is 4.5%, and Verizon has increased its dividend for 11 years in a row. The combination of a high Verizon dividend yield and cheap stock could make Verizon a buy-worthy Dog of the Dow.