The so-called “Dogs of the Dow” dividend investing strategy has historically delivered market-beating returns, but has underperformed the broader market over the past 5 years. However, analysis shows 3 Dow stocks in particular from the 2024 Dogs pack that could be primed to outshine in the year ahead.
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What are the Dogs of the Dow?
The Dogs of the Dow strategy invests in the 10 highest dividend-yielding Dow Jones Industrial Average stocks at the end of each year, holds them for one year, then repeats the process.
The premise is that the underperforming, higher-yielding Dow components are likely due for a comeback thanks to:
1. Mean Reversion – The strategy targets stocks that are out of favor and bets they will bounce back
2. Dividend Income – Focuses on established, dividend-paying blue chips
Why Have Recent Returns Lagged?
While the Dogs strategy has historically delivered around 8% annualized returns, it has underperformed the S&P 500 index 4 out of the past 5 years including in 2023, with a 7.1% return versus the S&P’s 21.8%.
Analysts attribute the decline in performance to:
- Poor returns from Walgreens, which has plunged 70% over 5 years
- The market favoring high-growth tech stocks over value and dividend payers
Apple and Microsoft have soared over 350% and 250% respectively over 5 years, while not being Dogs due to lower dividend yields.
3 Dogs Ready to Break Out in 2024
While the Dogs strategy has hit a rough patch, there are signs 2024 could see a reversal of fortune. Analyst ratings analysis identifies 3 Dow Dogs in particular well-positioned to outshine:
1. Coca-Cola (KO)
2. Goldman Sachs (GS)
3. Chevron (CVX)
These 3 Dogs sport the highest analyst Buy ratings among the 2024 Dogs pack, with nearly 70% of analysts rating them a Buy on average compared to just 40% for the entire 2024 Dogs group.
Coca-Cola (KO)
The beverage giant sports a 3.1% dividend yield and has strong analyst support heading into 2024. Coca-Cola has built durable competitive advantages around its unrivaled distribution network, portfolio of 20 billion-dollar brands, and unparalleled consumer reach.
While soda consumption is declining in North America, Coca-Cola is offsetting this by expanding into faster-growing categories like juices, sparkling water, tea and coffee. Top-line growth is forecast to accelerate from 7% in 2023 to 8% in 2024. Its dividend king status and 59 years of consecutive dividend growth provide income stability.
Upside Catalysts:
- Expanding share of growing beverage categories
- Robust emerging markets growth
- Steady cash flows to support dividend payouts
Goldman Sachs (GS)
The banking giant also pays a 3.1% yield. Goldman Sachs has leading franchises across investment banking, trading, asset management and consumer banking. Its outsized exposure to the healthy mergers and acquisitions activity has been a tailwind.
The consumer banking segment is still in growth mode after the launch of Marcus checking accounts and savings products. This provides an additional avenue for high-margin loan growth. Earnings per share are projected to climb 15% in 2024, supporting further gains.
Upside Catalysts:
- Riding the M&A and IPO wave
- Expanding Marcus digital consumer banking
- EPS growth driving valuations higher
Chevron (CVX)
Rounding out the trio is integrated oil major Chevron, which offers a 4.2% dividend yield. With its advantaged assets, Chevron is one of the lowest cost producers globally. Surging oil and gas prices have Chevron gushing cash, enabling it to aggressively raise shareholder payouts.
Its $75 billion share repurchase program underway equates to 20% of its market cap. Chevron also has a rock-solid balance sheet with a net cash position, providing resources to fund new oil developments even if prices moderate. Earnings are forecast to jump another 25% in 2024 after doubling in 2023.
Upside Catalysts:
- Oil prices over $80 per barrel
- Soaring free cash flow generation
- Potential for increased buybacks and dividends
The 2024 Dogs of the Dow list includes Verizon, Dow Chemical, Walgreens, 3M, IBM, Amgen, Cisco Systems, Chevron, Coca-Cola and Goldman Sachs.
While the Dogs strategy overall faces an uncertain outlook after years of underwhelming returns, analysis shows Coca-Cola, Goldman Sachs and Chevron in particular emerging as early 2024 outperformers capable of delivering healthy total returns driven by dividends and upside potential.
Disclaimer:
The Information is not an investment advice, it is for educational purpose only.