3 Dogs Of The Dow Picks For The New Year

dogs of the dow picks


Last year was a great one for stocks, with the Nasdaq having one of its best calendar year gains in the recent past and the S&P 500 Index performing well, too. However, with 2023 behind us, it is time to look forward and potentially add to existing holdings.

One place to look is the 2024 Dogs of the Dow list. It comprises the ten stocks with the highest yields at the end of the calendar year 2023. They are usually companies that have operational challenges. Alternatively, the sector or industry may have been out of favor with investors.

That said, three of the ten stocks stand out because of their yield, dividend safety, and long-term dividend growth. We discuss 3 Dogs of the Dow picks: Coca-Cola (KO), Chevron (CVX), and Cisco Systems (CSCO) as potential candidates to add a portfolio.


3 Dogs of the Dow Picks for the New Year


Coca-Cola (KO)

Coca-Cola (KO) is arguably the quintessential income stock. it is our first Dogs of the Dow pick in 2024. The firm has a long history of generating investor gains and dividend payments. It was founded in 1886 and has grown into the largest packaged drink company in the world. Coca-Cola sells almost every type of non-alcoholic drink, like carbonated soft drinks, water, sports drinks, dairy, juices, teas, coffees, and energy drinks. The firm generated more than $45 billion from its many brands.

Coca-Cola’s brands include well-known ones like Coke, Diet Coke, Sprite, Minute Maid, Fanta, Fresca, PowerAde, Schweppes, Dasani, Gold Peak, Honest Tea, Topo Chico, FUZE Tea, Costa, Schweppes. Many are leaders globally, with 26 brands reaching at least $1 billion in revenue.

The firm grows by selling more drinks through its large network of distributors. It does so through extensive advertising and marketing to increase volumes. Also, product extensions add to sales. Lastly, Coca-Cola periodically raises prices. Besides organic growth, the beverage giant conducts tuck-in acquisitions, expanding its brand portfolio. The last major M&A was Body Armor, an energy drink; before that, Costa Coffee.

The forward dividend yield is just shy of 3.1%, almost precisely the 5-year average. Coca-Cola paid a dividend since 1920, making it one of 24 American companies on the list of longest dividend-paying equities. In addition, the firm has a 62-year dividend growth streak and is on the list of Dividend Kings.

Coca-Cola usually increases the dividend between 3% and 5% annually because the payout ratio is elevated at ~69%. However, dividend safety is high because of stable revenue, earnings, and free cash flow. Portfolio Insight gives the company a ‘B+’ dividend quality grade, adding confidence about the annual payout.

The equity typically trades at an elevated valuation, but the forward earnings multiple is 21.4X, below the 5-year range. We view Coca-Cola as a long-term buy.

(Click on image to enlarge)

Portfolio Insight - Dividend Yield History KO

Source: Portfolio Insight


Chevron (CVX)

Chevron (CVX) Corporation is one of two integrated American global oil giants. The firm operates in two business segments: Upstream and Downstream. The Upstream segment explores, develops, produces, and transports crude oil and natural gas. The Downstream segment refines crude oil into petroleum and petrochemical products. 

Total revenue was $202,702 million in the last twelve months, somewhat lower than in 2022 because of lower oil prices.

The oil giant grows primarily by exploring and developing new crude oil and natural gas projects. This is inherently a capital-intensive endeavor, giving a company of Chevron’s size an advantage. Once a field and the potential oil or natural gas amount are verified, the quantity is added to reserves. Next, development may take years before production starts and is scaled.

In addition, Chevron grows by acquiring smaller companies. It is currently pursuing Hess Corporation (HES) in a $53 billion takeover. Before Hess, the company acquired ChacroServicios, Renewable Energy Group, Noble Energy, and Puma Energy Australia in the past few years.

Because of lower oil prices, Chevron’s revenue was lower in 2023 than in 2022. Consequently, the share price declined from its peak in early 2023. Simultaneously, the dividend yield has risen to approximately 4.2%, more than double that of the average for the S&P 500 Index. Chevron typically increases the dividend rate from 4% to 6% annually.

The excellent dividend safety will probably cause more increases to come. The firm is a Dividend Aristocrat with a 36-year streak. The payout ratio is moderate at ~43%, and free cash flow more than covers the ordinary dividend. Chevron earns a ‘B’ dividend quality grade. It also has an AA-/Aa2 high-grade investment credit rating, giving greater confidence about safety.

Besides the excellent yield, dividend growth, and long history of paying a dividend, the equity is undervalued. As a result, the equity is our second Dogs of the Dow pick. The forward price-to-earnings (P/E) ratio is ~11X, on the lower end of the 10-year range.

(Click on image to enlarge)

Portfolio Insight - Dividend Yield History CVX

Source: Portfolio Insight


Cisco Systems (CSCO)

Cisco Systems (CSCO) is the market leader for Internet Protocol networking. The company designs, manufactures, and sells enterprise hardware and software for networking, switching, routing, data centers, and wireless applications. Also, Cisco offers software for networking, analytics, collaboration, security, and firewalls. The firm is ranked 15th in the 2023 Interbrand’s Best Global Brand list. Networking dominance allowed retail revenue to reach nearly $57 billion in fiscal year 2023.

The company grows organically by selling more hardware, software, and services to its many customers globally. Cisco innovates to add features and security to its products. It also offers subscriptions, allowing Cisco to receive more consistent revenue streams.

Because networking is a mature market, Cisco purchases several small companies yearly to bolster its offering and maintain technological leadership. However, Cisco occasionally buys larger companies. It announced a deal to buy Splunk (SPLK) for $28 billion, adding to its security offerings. 

Cisco has paid a dividend for 13 years, making it a Dividend Contender. Because of flattish share price performance in 2023, the yield has risen to ~3.1%. The firm has increased the dividend by about 4% per year on average in the trailing five years. The modest payout ratio of ~40% suggests more increases in the near future. Cisco’s dividend has high safety because of free cash flow and the net cash position on the balance sheet.

Cisco is undervalued now and is thus our third Dogs of the Dow pick in the New Year. The forward P/E ratio is 13X, below the five- and ten-year ranges. Investors are getting a market leader at a reasonable price.

(Click on image to enlarge)

Portfolio Insight - Dividend Yield History CSCO

Source: Portfolio Insight


More By This Author:

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Walgreens Boots Dividend Cut
The 2023 Economy And Stock Market Year In Review

Disclosure: Long KO, CSCO.

Disclaimer: Dividend Power is not a licensed or registered investment adviser or broker/dealer. We are not providing you with individual investment advice on ...

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