Meet the Preliminary Dogs of the Dow for 2018

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It is no secret that the bull market’s strength heading into 2018 is nearing uncharted territory. Wall Street strategists have recently raised their 2018 stock market expectations after the passage of tax reform. And investors still love their dividends, particularly safe and rising dividends.

One strategy that has been popular each year as investors rebalance and make changes is the Dogs of the Dow. While the term “dog” may sound quite negative, this is the 10 highest dividend yields in the Dow Jones Industrial Average.

24/7 Wall St. and its founders have tracked the Dogs of the Dow strategy for years now. Short-term interest rates have risen in 2017, but long-term rates remain lower than many strategists would have expected. Those Treasury rates also still look quite low by historical standards at a time when growth is picking up. Very few investors seem to be worried that interest rates are going to rise enough to wreck the stock market or the economy.

The 2017 Dogs of the Dow had an average yield of 3.6%, and the preliminary list of the Dogs of the Dow for 2018 looks to be closer to a yield of 3.1%. That being said, we currently have 11 “dogs” rather than 10 due to the controversy of General Electric. If we just use the 10 ‘dogs” then we have a median yield of closer to 3.3%.

One issue that has driven down the average yield for this preliminary 11 (which will be 10 on January 1) is that the Dow was up 25% so far in 2017, if you include dividends. As a reminder, as a stock price rises its yield comes down on a static basis without a company raising its payout.

Most Dogs of the Dow companies should be expected to raise their dividends in 2018. Also, many of the stock prices at the end of 2017 have implied upside to the Thomson Reuters consensus analyst price targets for the next 12 months.

While investors still love dividends, the reality is that the current Dogs of the Dow picked for 2018 are all serious laggards in 2017. Only Cisco has outperformed the Dow, and four of the Dogs were still negative in 2017.

Some of the top Dow stocks have now raised their dividends for 25 to 50 consecutive years. With repatriation of foreign cash and lower tax rates, some of these companies could handily raise dividends. Some may choose buybacks.

For a comparison, the yield on the 10-year Treasury was close to 2.45% and the 30-year Treasury was roughly 2.83%. We have used Thomson Reuters for consensus analyst target price data. We have offered a detailed view of the 2017 Dogs of the Dow for a comparison.

Here are the 11 candidates for the Dogs of the Dow in 2018. Again, there will be only 10 once the end of 2017 is final in a few days.

1. Verizon
> Yield: 4.44%

Verizon Communications Inc. (NYSE: VZ) may still have a lower dividend than rival (and former Dow member and Dog) AT&T, but it has managed to get back to almost flat for 2017. Verizon has a history of raising its payouts year after year. Verizon’s consensus analyst target price is $51.83, while shares were last seen trading near $53.50.

2. IBM
> Yield: 3.93%

International Business Machines Corp. (NYSE: IBM) remains stuck in the mud. Despite the growth of cloud, artificial intelligence and blockchain, IBM’s core IT-services operation remains the lion’s share of the operation, and it is keeping its growth elsewhere from seeming impressive. IBM’s shares were down 8% so far in 2017. Trading at $153.50, it has a consensus target price of $163.74.

3. Pfizer
> Yield: 3.76%

Pfizer Inc. (NYSE: PFE) has underperformed the Dow, with a gain of 11% so far in 2017. It faces drug price pressures as a continued potential risk. The share price of $36.10 compares with the consensus target price of $38.29.