Keeping it simple is often best when it comes to investing. That’s why buying an index fund is often the optimal investment most people can make and paying attention to the highest-yielding dogs of the dow. Because the S&P 500 has returned about 10% annually on average for the past 100 years, just buying an exchange-traded fund (ETF) could set them up for life.
Of course, who doesn’t want to do better than average? A popular strategy excelling at simplicity is to buy the top dividend stocks among the 30 companies comprising the Dow Jones Industrial Average. Because a stock’s yield is often inversely related to its recent performance, investors naturally pick value stocks that typically offer lower risk and a steady income stream. That’s a powerful combination for producing stellar returns.
Michael O’Higgins popularized Dogs of the Dow in his book Beating the Dow, first published in 1991. An investor buys equal dollar amounts of the 10 highest-yielding Dow 30 stocks and holds onto them for one year. Afterward, you sell them and start the process all over again. Wash. Rinse. Repeat. While returns may lag the index in any given year, it’s a proven strategy that beats the index over the long haul. What follows below are the three highest-yielding Dogs of the Dow.
Walgreens Boots Alliance (WBA)
Pharmacy chain Walgreens Boots Alliance (NASDAQ:WBA) is one of the highest-yielding dogs of the dow at 7.5% a year. With the stock down 30% year-to-date and off 35% from its 52-week high, there’s little wonder why Walgreen’s yield is soaring.
There are several reasons for its underperformance. Following the pandemic boom when Walgreens administered millions of doses of the Covid a year, the falloff has been dramatic. Only 400,000 shots were given out in the third quarter. That’s down 86% from the same period last year.
Also, Walgreens opted not to sell its U.K.-based Boots pharmacy chain and the beauty care business No7 Beauty. Investors looking for a U.S.-focused healthcare stock were disappointed. But hope springs eternal and Walgreens is again mulling whether to IPO the Boots chain. Its CEO also abruptly resigned in September as her executive stints at Kimberley-Clark (NYSE:KMB), Walmart (NYSE:WMT), and Starbucks (NASDAQ:SBUX) didn’t really match the skillset needed for a healthcare company.
That pushed Walgreens shares 32% higher in the last three months. With shares trading at just seven times earnings estimates and a fraction of its sales, the pharmacy operator could be a Dog that becomes your portfolio’s best friend.
Verizon (VZ)
The stock of telecom giant Verizon (NYSE:VZ) is also down in 2023, though not nearly as far as Walgreens. The 4% decline has helped push Verizon’s yield up to 7% annually. That makes it the second-highest-yielding Dow stock.
Despite leading a rather mature industry, Verizon is losing ground to rivals AT&T (NYSE:T) and T-Mobile (NYSE:TMUS). Where Verizon was until recently hemorrhaging subscribers, T-Mobile recently raised guidance for postpaid net additions to a range of 5.7 million to 5.9 million. AT&T said it had 6.6 million total wireless net adds in the third quarter. However, Verizon may have bottomed as it added 100,000 net postpaid additions last quarter.
The ongoing national rollout of 5G networks promises to be an inflection point for the telecom. It marks the most significant upgrade to the industry’s infrastructure in over a decade, which should grow the business. Verizon has over 10 million broadband subscribers and could pad its rolls further. After a disappointing 2023, investors might be wagging their tails with this Dog next year.
3M (MMM)
Industrial conglomerate 3M (NYSE:MMM) is ending the year on a strong note. Shares are up 24% from the lows hit in late October, helping to ease back its 5.8% yield. Having settled several legal claims against it, the market feels better about its future. Still, it’s not smooth sailing for the owner of Post-It notes and Scotch brand tape.
3M still faces significant liability risk over so-called forever chemicals from a subsidiary it acquired. In addition to various U.S. lawsuits, Europe is now suing the conglomerate over them too. It also faces the prospects of slow growth, particularly in China. While selling its healthcare unit could give it an infusion of cash, the business was 3M’s top performer. Some analysts even question the sustainability of its dividend.
The stock is cheap, for sure. It goes for 10 times estimates and just 12 times its free cash flow. But management warns it has little visibility into when growth will return. Yet the worst seems to be behind 3M. That could make for an exciting 2024 as the stock continues to march back from decade lows. That still might not be enough to make 3M the top dog on the Dow.
On the date of publication, Rich Duprey held a LONG position in WBA, T, KMB and MMM stock. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
