The “Dogs of the Dow” strategy consists of investing in the 10 highest-yielding stocks in the Dow Jones Industrial Average. Purchasing the Dogs of the Dow creates higher dividend income by focusing on high-yielding stocks. This is a simple strategy for value investors looking to purchase high-yield dividend stocks with reasonable valuations.
The following three stocks are part of the 10 Dogs of the Dow. They have high dividend yields and strong business models and should maintain their dividends in a recession.
Dow Inc (DOW)
Dow Inc (NYSE:DOW) is a standalone company that was spun off from its former parent, DowDuPont. That company has broken into three publicly traded, standalone parts, with the former Materials Science business becoming the new Dow Inc. Dow should produce about $49 billion in revenue this year and trades with a market capitalization of about $38 billion.
Dow reported first-quarter earnings on April 25, and results were much better than expected in terms of both revenue and profits. Adjusted earnings per share (EPS) came to 58 cents, 21 cents ahead of estimates. Revenue of $11.9 billion was $560 million better than expectations. Volume was off 11% year-over-year, led by a decline of 15% in the Europe, Middle East, Africa and India region.
Operating cash was $531 million, down $1.1 billion year-over-year. Free cash flow conversion was 85% of net income on a trailing-12-month basis. The company noted it was focused on cost savings in the face of weak revenue and that this should help maintain margins throughout 2023.
Future growth is likely in the coming years from stabilized pricing, which has improved in recent years, margin gains from cost savings, and the company’s share repurchase program. These factors combined should afford Dow the ability to produce some measure of earnings-per-share growth under normalized conditions.
The company’s product portfolio is not only its competitive advantage but also should perform well enough during downturns to keep the company profitable. Its focused efforts on high-growth areas such as consumer care, packaging, and infrastructure, as well as its very long operating history as a component of the former company, and its brand, as competitive advantages.
Dow’s payout ratio is currently at 88% of estimated earnings. This is relatively high, which could limit future dividend raises. Given the strong yield, management is focusing on boosting the buyback allocation. The stock yields 5.4%.
Chevron (CVX)
Chevron (NYSE:CVX) is the fourth-largest oil major in the world based on its market cap of roughly $300 billion. Chevron is an integrated super-major, meaning it has large upstream and downstream businesses. Most of the company’s revenue is derived from its upstream exploration and production activities.
In late April, Chevron reported financial results for the first quarter of fiscal 2023. Its production dipped 1% sequentially due to the end of a concession in Asia, which more than offset high production growth in the Permian. Refining margins remained near record levels thanks to the sanctions of western countries on Russia, but oil and gas prices somewhat moderated. As a result, EPS declined 13%, from $4.09 to $3.55.
Chevron has announced a massive share repurchase program of $75 billion, enough to reduce the share count by 25%. Such a large buyback would provide a meaningful boost to EPS growth. Future earnings growth will also be driven organically by new oil and gas projects and production ramp-ups. Chevron is now in the positive phase of its investing cycle and is likely to return to growth mode this year thanks to its sustained growth in the Permian Basin and in Australia. The company has more than doubled the value of its assets in the Permian in the last four years thanks to new discoveries and technological advances.
Thanks to the high grading of its asset portfolio, Chevron can fund its dividend even at an oil price of $40. With WTI prices at $70 per barrel, the company can generate plenty of cash flow to fund its growth and continue to raise the dividend. Chevron has raised its dividend by 6% in each of the last two years and is likely to keep raising its dividend in the upcoming years. The company has increased its dividend for over 35 years. The stock currently yields 3.9%.
Amgen (AMGN)
Amgen (NASDAQ:AMGN) is the largest independent biotech company in the world. Amgen discovers, develops, manufactures and sells medicines that treat serious illnesses. The company focuses on six therapeutic areas: cardiovascular disease, oncology, bone health, neuroscience, nephrology and inflammation. Amgen generates about $28 billion in annual revenues and operates in approximately 100 countries.
In the most recent quarter, revenue declined 2.2% to $6.1 billion, which was $140 million less than expected. Adjusted EPS of $3.98 compared unfavorably to $4.25 in the prior year. However, this was in-line with estimates. Results were negatively impacted by lower revenues from Covid-19-related sales. Product revenue increased 2% while volumes were higher by 14%.
Prolia, which treats osteoporosis and is now the company’s the top grossing product, grew 9% to $927 million, driven by an 8% increase in volume. Repatha, which is used to control cholesterol, increased 18% to a record $388 million. Amgen reduced prices for Repatha in 2018 and this has allowed the product to capture market share. Volumes were higher by 33% during the quarter, helping to offset lower selling prices. More than 1.7 million patients have received a prescription for Repatha.
Amgen is in strong financial position. The company ended the quarter with $31.6 billion of cash and cash equivalents. Amgen provided updated guidance for 2023 as well. The company now expects adjusted earnings-per-share in a range of $17.60 to $18.70 for the year, up from $17.40 to $18.60. At the midpoint, this would be a 2.6% improvement from the prior year.
Amgen has been a strong dividend growth stock. The company has increased its dividend for 12 consecutive years. In 2022, the company hiked its dividend by 10%. The dividend is highly secure, as the company has a 2023 payout ratio expected at under 50%.
And, the dividend can be maintained even in a recession. Amgen’s profitability holds up very well during economic downturns. Companies in the health care sector are often recession-resistant as people will seek treatment for their health issues regardless of economic conditions. The company also has a very low payout ratio that will allow it to continue to raise its dividend going forward, even in a prolonged recession. AMGN stock yields 3.8%.
On the date of publication, Bob Ciura did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
