Many investors seek out both the income of long-paying dividend stocks and security of owning shares of some of the world’s most stable companies – like those in the Dow Jones Industrial Average. So it should be no surprise to learn that there’s a common strategy called “The Dogs of the Dow” that combines both of these ideas.
The Dow is made up of 30 of the largest U.S.-based stocks in the market. Just this spring, Apple (NASDAQ: AAPL) was added. So you can see it evolves as the market does. Large and stable companies like Procter & Gamble (NYSE: PG), Exxon Mobil (NYSE: XOM) and Wal-Mart Stores (NYSE: WMT) fill its small portfolio.
The key to “The Dogs” is the compounding income from dividends — plus the stability of this list of stocks. That can make for an effective approach. And as explained by Michael B. O’Higgins in his 1991 book “Beating the Dow,” in which he first proposed “The Dogs,” it can also be quite easy.
“The Dogs of the Dow” are the 10 highest dividend-yielding stocks out of the 30 Dow constituents. They are updated annually, at year-end.
On Dec. 29, Andy Crowder introduced in these pages the idea of “The Small Dogs of the Dow” — a more specialized play on this strategy. He starts with the regular “Dogs” and recommends an equal investment in the five lowest-priced stocks. So far this year, his “Small Dogs” strategy is already outperforming the regular Dow 3.53% to 0.74%.
This strategy clearly works. But that doesn’t mean you are excluded from participating in the market the rest of the year.
While the list below isn’t an exact representation of “The Small Dogs of the Dow,” they do represent what I believe to be the five best dividend opportunities right now in the Dow. All five are great buys for the month of May.
No. 1 Dow Dividend Stock: Johnson & Johnson (NYSE: JNJ)
As one of the most recognizable name brands in the world, it shouldn’t be a surprise to see Johnson & Johnson on a list of either Dow components or dividend-paying giants.
Johnson & Johnson has the trifecta of health care: pharmaceuticals, medical devices and consumer products. Its drug and device businesses are by far its largest, raking in $32.3 billion and $27.5 billion last year, respectively. But it is Johnson & Johnson’s Consumer Sales segment that really makes this a stable play, with brands like Band-Aids, Listerine and Tylenol.
Right now, Johnson & Johnson looks even better than it usually does. Investors have been piling into Johnson & Johnson shares over the past several years for the obvious reasons — its safety, dividend and growth profile. But fortunately for you, so far in 2015, shares have come back down to earth. They are currently resting at $100, giving J&J extremely attractive price multiples. With annual dividend payments of $3 per share, that also gives you a Dow-beating 3% dividend yield.
No. 2 Dow Dividend Stock: Coca-Cola (NYSE: KO)
If you go anywhere in the world, you can grab yourself a Coke. So, like Johnson & Johnson, it’s not hard to imagine Coca-Cola making this list. The company has a market cap of $177 billion, annual sales of $46 billion and net profits of between $7 and $9 billion. But over the last two years, you could hardly find an investor interested in owning it.
Now, Coca-Cola hasn’t exactly been slipping. But investors have worried about its growth prospects. Unlike its rival (PepsiCo: PEP), Coca-Cola doesn’t have an enormous snack or food group to supplement its income. But that’s not a bad thing. PepsiCo has struggled and spent billions over the years dealing with the global focus of healthier snack choices. Coca-Cola doesn’t have to worry about that nearly as much. Still, growth just hasn’t existed since 2012. That’s changing.
With Coca-Cola’s huge new strategic initiatives program, it is already seeing growth return. First-quarter organic sales grew 8%. And the company beat analyst estimates each of the last two quarters. Investors should start to take notice when they see even larger year-over-year increases roll in for the second half of this year.
Coca-Cola’s next earnings announcement isn’t until late July. But I recommend you get in well before then if you want to lock in Coca-Cola’s robust 3.2% dividend yield. For reference, it yielded just 1% some 15 years ago. This is a great entry opportunity in this global giant.
No. 3 Dow Dividend Stock: Intel (NASDAQ: INTC)
Intel hasn’t seen much “good press” these past few years. With the success of tablet computers, few are giving much thought to the king of PC hardware. What most aren’t paying attention to is Intel’s impressive penetration into this new mobile market.
Sure, Intel wasn’t the first to develop chips that powered the first generation of tablets. But it has major deals with Samsung and even Apple for products going forward.
And despite all the negativity concerning the future of PCs, it’s just not realistic to think that market will dry up completely. I’m writing this on an Intel-powered device. And there’s a good chance you’re reading it on one. With Intel’s 80% market control of PC chips, this is another mainstay Dow company.
Since Intel began paying a dividend in 1992, it hasn’t missed a single quarter. Better still, in January, Intel began growing those quarterly payments again.
Before the investing crowd wakes up, now’s the time to take advantage of Intel’s cheap stock price and sizable 3% dividend yield.
No. 4 Dow Dividend Stock: Chevron (NYSE: CVX)
It doesn’t take a price junkie to know that oil is out of favor. After the price of crude slipped from its perch of $100 per barrel last summer, it took a nosedive to below $50 early this year. After crude has tested its bottom twice, it looks like investors are back in – but not nearly as enthusiastically. And that’s exactly why you need to consider shares of Chevron, one of two major oil plays in the Dow.
Chevron has managed oil’s fall about as well as it could. Earnings didn’t drop nearly as much as they did for most drillers. But because of Chevron’s high profile and industry, shareholders have flown out of its stock. Right now you can pick up shares for about half of what they should be running at, at least in the long term.
Chevron made the cut over Exxon because of its balance sheet. Chevron has plenty of cash on hand and low debt. Without knowing exactly how long it’ll be until we see $100 oil return, that’s important.
With a price-to-earnings ratio of just 10.7 and a dividend yield of 4%, now’s an ideal entry point for one of the largest energy plays in the world.
No. 5 Dow Dividend Stock: Wal-Mart Stores (NYSE: WMT)
Wal-Mart needs no introduction here. If you live in the United States, you probably even know exactly how many miles it is to your local store. And if you don’t live in the U.S., you’ll know what I’m talking about in just a few years.
Wal-Mart’s lightning-quick growth internationally is only one side of this story. The company is the model that every other retailer – including online sellers like Amazon.com (NASDAQ: AMZN) – uses for efficiency and profitability. It coordinates the largest shipping, warehousing and retailing operations in the country… and it does it better than companies that focus more on smaller areas.
Right now, however, you can build your position in the global retailer cheaply. Shares have come back down from their peak at the start of this year. I believe they will reverse course and head back toward those higher numbers during the second half of the year. Wal-Mart reports quarterly earnings later this month. That could springboard the stock. And while it’s not as sexy as some, Wal-Mart’s 2.5% dividend yield is larger than the company usually pays. Now’s the time to get in.
As an annual strategy, you should definitely consider “The Small Dogs of the Dow” strategy. If you’re looking for some attractive dividend stocks you should own for the month of May and beyond, these five are the perfect place to start.
Dividends for Every Month of the Year
If you’re looking for just one dividend stock to round out your income stream, consider a little-known company that pays out dividends 12 months of the year.
Click here to see the full details of this company in my Dividend Calendar…