Meet the 2017 Dogs of the Dow: Massive Dividends and Expected Upside

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The year 2016 went out with a bang for stock investors after large November and December post-election rallying. Closing at 19,762.60 on December 30, the Dow Jones Industrial Average may have not hit the 20,000 mark but it closed out 2016 with a gain of 13.4% from the 17,425.03 close on the last trading day of 2015.

While Donald Trump’s infrastructure and pro-growth initiatives have created a serious demand for industrial, infrastructure, consumer and growth stocks, many investors are going to still have to look for yields in equities that can offer both growth and income versus Treasuries. One strategy that has been quite common as investors rebalance and make changes each year is the Dogs of the Dow.

Quite simply this is the 10 highest dividend yields in the Dow. 24/7 Wall St. and its founders have tracked the Dogs of the Dow strategy for years now. While interest rates are set to rise in 2017, the reality is that those rates remain quite low by historical standards, and very few investors worry that rates are going to rise enough to wreck the stock market or the economy.

There are two measurements used for implied upside here in the 2017 Dogs of the Dow. Most or all of these companies should be expected to raise their dividends in 2017. Also, many of the stock prices at the end of 2016 have implied upside to the Thomson Reuters consensus analyst price targets for the next 12 months.

It is clear that investors still love dividends. They love companies that raise dividends year in and year out even better than just having the same dividend year after year. And to make matters even more attractive, some investors expect better dividend tax treatment ahead under the Trump tax plans. Some of the top Dow stocks have now raised their dividends for 25 to 50 consecutive years, so add on an earnings and economic growth story and you know why investors care.

While the “Dogs” name is a misnomer, the logic behind this strategy on a historical basis was that the higher yields might have had less investor interest or lower performance previously. That is true for some of the 2017 Dogs of the Dow, but one of the Dogs was the best performing Dow stock in 2016. As a reminder, as a stock price rises its yield comes down on a static basis without a company raising its payout.

The average yield for the 2017 Dogs of the Dow is almost 3.6%, down slightly from 2016 but closer to 2015’s Dogs. This 3.6% would compare to a yield of 2.44% for the 10-year Treasury and 3.06% for the 30-year Treasury. Note that all 10 Dogs of the Dow for 2017 currently outyield the 10-year Treasury by more than a full percentage, and they even outyield the 30-year Treasury by a half-percent on average. Most Dow stocks are expected to have stable earnings growth in the years ahead. There are technically 11 Dogs of the Dow, unless you back out the rounding issues.

Oddly enough, our bullish Dow case was 19,700 for 2016, and the 2016 Dogs of the Dow were not all the same. Meet the 2017 Dogs of the Dow!

1. Verizon
 > Yield: 4.33%

Verizon Communications Inc. (NYSE: VZ) was yielding 4.49% earlier in December, but a year-end rally made its yield 4.33%, for the top yield of all Dow stocks. It had a return of about 20.7% in 2016, beating the Dow despite concerns that high-yield defensive dividends would underperform ahead. Its performance was almost 7% in December alone. This telecom giant now owns AOL and is still in the hunt for acquiring Yahoo. It was always a lock to be the top Dow yield, at least now that AT&T is out of the Dow.

Shares of Verizon closed out 2016 at $53.38, with a consensus analyst price target of $52.55 and a 52-week trading range of $43.79 to $56.95.