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

December 31, 2016 by Jon C. Ogg

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.

2. Pfizer
 > Yield: 3.60%

Pfizer Inc. (NYSE: PFE) had closer to a 3.75% yield in early December, but a rally made its 3.60% yield still better than rival Merck. Pfizer shares were up only about 2% so far in 2016, versus almost 19% for Merck. One problem for Pfizer is that it largely has been ignored by investors in the post-election rally, and there is the concern that Trump has said he is concerned and not happy about drug price trends in America.

Shares of Pfizer recently closed at $32.48, with a consensus price target of $37.65 and a 52-week range of $28.25 to $37.39.

3. Chevron
 > Yield: 3.73%

Chevron Corp. (NYSE: CVX) handily outyielded Exxon Mobil as the oil giant rivals seek to entice shareholders. Chevron shares performed quite well in 2016, with a return of 36% for the year and just over 5% in December. Chevron in the past also has promised more dividend hikes, and the oil price rise may allow that to continue. Now the oil tycoons are excited about oil and energy under a Trump administration.

Shares of Chevron last closed at $117.70. The stock has a consensus price target of $119.65 (almost $3 higher than the start of December) and a 52-week range of $75.33 to $119.00.

4. Boeing
 > Yield: 3.65%

Boeing Co. (NYSE: BA) saw its dividend yield rise by leaps and bounds at the end of 2016 due to a much larger dividend hike than some of us anticipated. Its gain was 3.4% in the last 30 days, but its return was listed as 11% in 2016. It remains to be seen if Boeing can raise its dividends by unexpected amounts over and over ahead.

Trump has tweeted that the multibillion dollar cost for Air Force One is ridiculous, and its 787 Dreamliner is seeing orders trimmed down due to economics of flight. Still, this was an impressive jump in the rank of Dow dividend yields.

Boeing closed at $155.68 at the end of 2016, with a 52-week range of $102.10 to $160.07 and with a consensus target price of $156.50.

5. Cisco Systems
 > Yield: 3.44%

Cisco Systems Inc. (NASDAQ: CSCO) treaded water at the end of 2016 due to much of its business coming from growth and emerging markets. Still, it could be a huge winner in overseas cash repatriation efforts (if successful) in 2017. Cisco remains the king of dividend yields in the largest technology stocks, and it also keeps buying back stock as well.

Cisco’s position has remained firm as a networking, data center and security leader, and it has raised dividends handily since it began paying out. Cisco even suggested more dividends and buybacks if it gets to repatriate its $60 billion or so in overseas cash. Its 3.4% yield contributed to the 15.1% gain seen in 2015, but it rose just 1.3% in December and was negative for the last quarter.

Cisco shares closed out 2017 at $30.22, in a 52-week range of $22.46 to $31.95 and versus a consensus price target of $33.11.

6. Caterpillar
 > Yield: 3.41%

Caterpillar Inc. (NYSE: CAT) remains a challenging business, and all the infrastructure hopes were not even given huge upside when Caterpillar gave its 2017 guidance. Still, it was the best performing Dow stock in 2016 with a return of 42.1% for the year (even with close to −3% in December).

This gain was far from expected, and most of it was long before the post-election rally when Trump talked up infrastructure galore. Its dividend yield would have even been stronger had the performance not been so high.

Caterpillar shares closed out 2016 at $92.74, in a 52-week range of $56.36 to $97.40. The consensus price target is now $86.89, up over $3 just in the past month alone.

7. Coca-Cola
 > Yield: 3.38%

Coca-Cola Co. (NYSE: KO) generated a return of −0.36% in 2016 but was up 2.75% in December. Its post-election move has not been impressive due to a lack of caring about defensive stocks in a rising interest rate environment. Investors right now prefer growth and infrastructure, or those that can win more under the Trump plans.

Shares of Coca-Cola closed out 2016 at $41.45. The consensus price target is $45.54 (down over $1 in December alone), and the 52-week range is $39.88 to $47.13.

8. IBM
 > Yield: 3.37%

International Business Machines Corp. (NYSE: IBM) has seen its performance lag for longer than most shareholders would like to admit. Still, it performed with a 25% gain in 2016, and just 2.3% of that move was in December.

Warren Buffett has honestly had very little new to say here on his huge stake in IBM, just holding on to the great American future and earnings power. IBM’s position in the Dogs of the Dow lost one place over the final two weeks of December, but it is in the spot where just five Dow dividends yield within 12 basis points of each other.

Despite the woes, IBM has room to keep gradually raising its dividend ahead even if the core IBM business is taking a backseat to its smaller new business initiatives. Those growth initiatives just are not currently expected to be able to grow fast enough, but what if analysts are wrong?

Shares of IBM closed out 2016 at $165.99. The consensus price target is $156.62, and the 52-week range is $116.90 to $169.95.

9. Exxon Mobil
 > Yield: 3.32%

Even though Exxon Mobil Corp. (NYSE: XOM) so far has underperformed Chevron in the past year, its 19.9% return in 2016 was after a 3.4% return in December. This marked a handy difference from the drop in oil that was seen from late in 2014 into early 2016. Exxon also has a strong balance sheet and can keep raising its payout ahead.

With CEO Rex Tillerson selected as Secretary of State under Donald Trump, Exxon is about to get new leadership — Tillerson might have been headed for retirement soon anyhow. It seems that Exxon and the oil industry (and even rival Chevron) will have a good relationship with Washington, D.C., in 2017 and beyond.

Shares of Exxon Mobil closed out 2016 at $90.26, with a consensus price target of $88.05 and a 52-week range of $71.55 to $95.55.

10. A Tie at 3.19% — sort of!

It is unusual for this to occur, but there are two Dow stocks that closed out 2016 with yields at an identical 3.19%, if you just use two decimal places. That tie exists between Merck & Co Inc. (NYSE: MRK) and Procter & Gamble Co. (NYSE: PG).

Merck’s dividend was shown to be 3.1934% if we go four decimals out, versus a yield for P&G that was actually 3.1874%.

Merck shares posted a simple gain of 11.5% in 2016, even after losing 3% in December. P&G closed out 2016 at $84.08, with a share price gain of 5.9% for the year, after rising right at 2% in December.

Yield and performance metrics are from FINVIZ, and other data from Yahoo! Finance and Thomson Reuters.

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