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3 Best "Dogs of the Dow" Stocks to Bet on in 2021

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Supriyo Bose
·5 min read
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After a frightful 2020, the world has eagerly greeted the New Year on hopes that it would eliminate the coronavirus menace and usher in a fresh start for mankind. Despite the widespread damages last year, it proved to be a solid one for investors, with U.S. equity markets scaling all-time highs. While the Dow Jones industrial average gained 7.25%, the S&P 500 index was up more than 16% backed by the federal government stimulus and optimism surrounding the rollout of coronavirus vaccines.

However, the yield on 10-year Treasuries that is widely regarded as one of the safest havens dropped to around 0.9% in 2020, forcing investors looking for healthy ROI to scout for stocks that offer solid dividend yield. The “Dogs of the Dow” is a leading stock-picking strategy in this regard and offers investors healthy dividend yield. Before we handpick three such stocks, let us delve a little deep into this concept.

The Concept of "Dogs of the Dow"

Blue-chip stocks that make up the Dow index are typically well-established and financially sound, with a robust dividend policy that aims to reward shareholders with risk-adjusted returns. However, the share price of these stocks often fluctuates through the business cycle with a company near the bottom of the cycle exhibiting lower share price than that exhibited at its zenith. Notably, a low share price translates to high dividend yield and vice versa. The “Dogs of the Dow” strategy aims at picking stocks that have high dividend yield and are consequently at the bottom of their business cycle, betting on the premise that these stocks are likely to appreciate more quickly than others at the middle or at the top of their business cycle. The strategy is used to identify 10 highest dividend-yielding stocks from the Dow Jones index each year.

Screening Parameters

We have selected three stocks from the “Dogs of the Dow” list that have a dividend yield of more than 3%. These stocks have a market capital in excess of $100 million and VGM Score of A or B. Moreover, these stocks have a solid Zacks Industry Rank and are placed within the top 50% of more than 250 Zacks industries. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.

Added to the intrinsic value proposition of these stocks, a healthy dividend yield satiates the appetite of risk-averse investors. The facts that these stocks have the potential to outperform the market, while also historically providing a decent dividend yield, have made them prized assets. Let us have a broad overview of three such stocks for a steady income stream in 2021.

3 Top Picks

Dow Inc. DOW: Headquartered in Midland, MI, Dow is a material science firm, providing a world-class portfolio of advanced, sustainable and leading-edge products. The company should gain from cost-synergy savings and productivity actions as it focuses on maintaining cost and operational discipline. Investment in high-return projects should also be accretive to its earnings. Dow is also taking actions to reduce its debt. The company appears to be a solid pick with a VGM Score of A, Zacks Industry Rank #95 (top 37%) and a dividend yield of 5.1%. Dow carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Verizon Communications Inc. VZ: Based in New York, Verizon offers communication services in the form of local phone service, long distance, wireless and data services. The company is likely to benefit from a disciplined network strategy, including accelerated 5G deployment despite economic uncertainties stemming from the COVID-19 crisis. The wireless operator is building the 5G home solution and mobile edge computing on the same network. With one of the most efficient wireless networks in the United States, Verizon continues to deploy the latest 4G LTE Advanced technologies to deliver faster peak data speeds and capacity for customers, driven by customer-focused planning, disciplined engineering and constant strategic investment. Verizon has been aggressively forging ahead to expand its fiber optics networks to support 4G LTE and upcoming 5G wireless standards as well as wireline connections. The company is focused on making necessary capital expenditures in order to support increased demand for network traffic. At the same time, Verizon is focusing on build-out of its 5G Ultra Wideband network, deployment of fiber assets across the country and shift toward Intelligent Edge Network architecture. The company appears to be a solid pick with a VGM Score of A, Zacks Industry Rank #100 (top 39%) and a dividend yield of 4.3%. Verizon carries a Zacks Rank #3.

Cisco Systems, Inc. CSCO: Headquartered in San Jose, CA, and founded in December 1984, Cisco is an IP-based networking company offering products and services to service providers, companies, commercial users and individuals. This largest player in the networking space has a strong presence in the router and switch market. Cisco’s focus on wireless carriers has increased of late, as evidenced by its opportune acquisitions. Mobile carriers are increasingly looking to make their networks more spectrum-efficient and put their network resources to use without having to materially increase capex expenditure. Also, the proliferation of smartphones has caused mobile data traffic to grow exponentially and the advent of high-speed LTE networks is likely to accelerate that growth. Therefore, networking solutions providers like Cisco that allow carriers to manage traffic efficiently are to become increasingly important in the coming years. The company appears to be a solid pick with a VGM Score of B, Zacks Industry Rank #61 (top 24%) and a dividend yield of 3.2%. Cisco carries a Zacks Rank #3.

Zacks Top 10 Stocks for 2021

In addition to the stocks discussed above, would you like to know about our 10 top tickers for the entirety of 2021?

These 10 are painstakingly hand-picked from over 4,000 companies covered by the Zacks Rank. They are our primary picks to buy and hold. Start Your Access to the New Zacks Top 10 Stocks >>


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