“When the going gets weird, the weird turn pro.”- Hunter S. Thompson
I know I’ve used this quote before, but it so applicable to so many situations, especially now considering the lofty state of equity markets. Markets do seem to be in weird place.
Pundits are almost split down the middle as to whether the current bull run has any more steam left. Some argue that valuations are stretched thin while others continue to pound the table, goading investors to pile in. Im splitting the difference.
The S&P 500 trades at 19.4 times expected earnings. We’ve seen it much richer in the past. However, there are some visible cracks showing.
Some sectors, such as energy and telecom services, are negative for the year. But despite news to the contrary, there are bargains in the market. Previously, I highlighted a consumer staples stockthat stood out in another lackluster sector.
One of the most consistently successful value investing strategies is the venerable Dogs of the Dow. Created in 1972, the year I started kindergarten, the remarkable beauty of the Dogs as an investment strategy is its simplicity: Buy the ten highest dividend yielders in the Dow Jones Industrial Average (DJIA).
Here is the current list of Dogs going in to 2018…
|IBM||International Business Machines||$151.84||3.95%|
|PG||Procter & Gamble||$88.45||3.12%|
Since its inception the Dogs strategy has turned in an average annual return of 11.5%, besting the index by 6.3% for the same period.
Collectively, the current dog pound boasts a dividend yield of 3.8%; 67% higher than the average corporate bond yield of all ten companies. Even more compelling, as of November 18, the average Dogs of the Dow stock was trading at an 11.5% discount to its 52-week high.
While the entire basket is comprised of the highest quality names an investor could own, here are three that are best positioned to rise in the near term.
1. Cisco Systems (Nasdaq: CSCO) — Still the global market leader in computer and telecom networking equipment, Cisco has been successfully transitioning its focus to a more service-centric business model, concentrating on software and subscription sales.
The results are starting to flow through. In the companys most recent earnings report, recurring revenue grew by 32%. However, the companys core hardware business will remain relevant in the growing “internet of things” environment. CSCO shares trade at $37.03 and yield 3.1%.
2. Verizon Communications (NYSE: VZ) — The top U.S. wireless telecom, with 149 million subscribers, Verizon has also managed to grow its digital content business, albeit quietly when compared to its acquisition-junkie rival AT&T (NYSE: T). Recently, the company has built a top brand portfolio of digital properties that include AOL and Yahoo as well as their attached email platforms. The end result will be a decent media offering with much lower acquisition costs, allowing its precious cash to be spent on its core wireless telecom business. VZ shares are priced at $47.45 with an attractive 5.0% dividend yield.
3. International Business Machines (NYSE: IBM) — Often referred to as “Big Blue,” the company remains a steady, franchise player in the technology space. Having made the shift from hardware to service and software long ago, the company delivers a wide spectrum of capabilities, including artificial intelligence (AI) development, cloud platforms, as well as big data infrastructure. The stock is attractively priced at $151.81 with a 4.0% dividend yield.
Risks To Consider: As all three of these stocks fall in the information technology space, their success lies in continued economic expansion. Any slowdown could threaten those prospects. But all three companies have successful recurring revenue models that deliver predictable, steady revenue streams. This gives all three companies a defense posture in the event of a recession.
Action To Take: Surprisingly, there are few if any pure-play Dogs of the Dow ETFs or mutual funds available. However, they have always been available in unit investment trust form (UIT). Money manager First Trust Portfolios is one provider.
Collectively, my favorite three Dogs yield a combined 4.1% and trade at an average forward P/E of 12.6, which is extremely cheap compared to the market as a whole. Long-term investors looking for income with above-average growth prospects should be able to outperform the Dogs. Expansion of the forward P/E from 12.1 to 14 would result in a total return of nearly 16% including dividends, outperforming the Dogs of the Dow historical average by 45%.
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