Dogs of the Dow 2021: 10 dividend stocks to watch

The Dogs of the Dow were flea-bitten last year, but this simple dividend-investing strategy will try to return to greatness in 2021.

  • By Ken Berman,
  • Kiplinger
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The "Dogs of the Dow" is an algorithmic strategy that caught Wall Street's attention in the 1980s, before algorithmic strategies became popular.

This basic portfolio of 10 dividend stocks is selected in the simplest of ways: At the beginning of each calendar year, buy the 10 highest-yielding stocks in equal dollar amounts. At the end of the year, sell them. Rinse and repeat.

As stock prices go up, yields go down, and vice versa. Thus, the idea behind the Dogs strategy is this: The highest-yielding dividend stocks in the Dow are likely underappreciated, and a reversion to the mean suggests their yields will adjust – by their prices going higher.

The Dogs of the Dow have a pretty good track record, delivering an average annual total return of 9.5% since 2000 – a full two percentage points above the S&P 500 index (.SPX). However, the past two years have thrown the Dogs off their scent.

"Prior to 2019, (the Dow Jones High Yield Select 10 Total Return Index, or MUTR) had an average annual total return of 9.5% from 2001-2018 vs 7.3% for the S&P 500 Total Return Index (.SPXT), which marked significant outperformance for the Dogs," writes BofA Global Research. "Factoring in 2019 and 2020, the average total return for MUTR back to 2001 moves down to 8.97% vs 9.06% for SPXT." That includes a negative 8.0% return in 2020.

But investing is a long-term game, and sticking with a strategy, over time, can prove more successful than chasing returns. So read on as we analyze the 10 dividend stocks the Dogs of the Dow strategy says you should buy.

Data is as of Jan. 4, except yield, which is as of Jan. 1. Stocks listed by dividend yield. Yields are calculated by annualizing the most recent payout and dividing by the share price.


Market value: $110.4 billion

Dividend yield (as of 1/1): 3.0%

Coca-Cola (KO) has been busy of late adding and creating brands, including Topo Chico Hard Seltzer, Aha sparkling water and Coca-Cola Energy.

But KO is getting smaller at the same time. In mid-2020, Coca-Cola announced that it would restructure its 17 business units into nine and reduce headcount. In late 2020, Coke announced it planned on dumping 200 drink brands, including Odwalla, Zico and even Tab.

The cuts are meant to counter slow, steady declines in its operations over the past few years; revenues and sales currently sit at levels last seen a decade ago.

The pandemic didn't spare Coca-Cola, of course. While at-home consumption rose, its sales to restaurants tumbled, weighing on case volume, revenues and operating income. This could turn around in the coming year with a return to normalcy, however. And its brand shuffling might just give KO the product balance necessary to stir a comeback in an aging and competitive market.

The one thing Coca-Cola perpetually has going for it, however, is that it's a Dividend Aristocrat – and a Dividend King, if we're being really specific. The dividend on KO shares has grown for 58 consecutive years, and it has the financial resources to keep the raises coming.

Meanwhile, its yield of 3% is both more than a percentage point better than the broader market, and high enough to warrant inclusion in the Dogs of the Dow for 2021.


Market value: $132.0 billion

Dividend yield (as of 1/1): 3.1%

Amgen (AMGN) is one of the largest biotech stocks on the market – a sprawling $132 billion behemoth whose products include the likes of Enbrel, which treats five chronic diseases, including rheumatoid arthritis; severe plaque psoriasis treatment Otezla, chemotherapy drug Neulasta; and Prolia, which slows bone loss in men.

2020 was something of a landmark year for Amgen, which was added to the Dow Jones Industrial Average in late August, replacing Big Pharma firm Pfizer (PFE).

But it also was a difficult year that saw the biotechnology firm actually lose 2% on a total return basis (price plus dividends). In addition to the general difficulties suffered by many healthcare firms as COVID-19 weighed on their regular business, Amgen struggled as a price increase on best-selling Embrel was effectively countered by insurers, who demanded higher rebates to keep the drug atop their formularies. Enbrel sales declined 3% in the company's most recent quarterly report.

There's good news, too, though – Prolia sales improved by 11% in Q3, Aimovig sales rocketed 59%, and Repatha revenues were 22% better year-over-year.

Amgen's weak 2020 also kept its dividend high, and it's only getting higher. AMGN, which has raised its payouts every year since initiating a dividend in 2011, announced a 10% hike for 2021, to $1.76 per share. That brought its yield up to 3.1%, elevating it into the ranks of the Dogs of the Dow.


Market value: $204.8 billion

Dividend yield (as of 1/1): 3.2%

Shares of Big Pharma firm Merck (MRK) produced a negative return of 7.2% in 2020, and that's including the benefit of its dividends. That performance reflected not just COVID-related issues in 2020, but the potential for those same issues to persist well into 2021.

Merck said that through Q3 2020, COVID-related impacts on pharmaceutical revenue were $2.1 billion and counting. In the grander scheme of things, that's relatively modest, at about 4% of Value Line's 2020 revenue estimate. But lower back-to-school rates have and may continue to hurt Merck's vaccine business, in particular its blockbuster Gardasil. Further, a resurgent and or lingering pandemic could continue to limit access to healthcare – another key driver for Merck.

And yet, analysts are broadly bullish on MRK. The stock has 17 Strong Buys or Buys versus five Holds and no Sells, according to S&P Global Market Intelligence data. While Gardasil declines hurt, Merck's oncology and animal health offerings – which constitute a much larger portion of total sales – notched solid, if not spectacular gains during the most recently reported quarter. And Merck has two promising COVID vaccine treatments in the pipeline.

So while fears of persistent COVID impacts are well-founded, Merck has just enough irons in the fire that it could turn things around in 2021.

And like several other Dogs of the Dow, Merck is a serial dividend raiser, though it doesn't have a long enough track record to enjoy membership among the Aristocrats. Most recently, the company announced a 6.6% hike to 65 cents per share, effective as of its January 2021 payout.

Cisco Systems

Market value: $185.8 billion

Dividend yield (as of 1/1): 3.2%

Cisco Systems (CSCO) shares also finished 2020 in negative territory. They were off by more than 30% at the market's March bottom, finishing with a total return of about -3.5%. And naturally, they've yet to truly challenge their frenzied peak of $77 all the way back in 2000 before the internet bubble burst.

Pundits like to say "it's different this time," but that might finally be an apt assessment of Cisco's prospects for 2021. While demand for hardware is off, the company is pivoting to software and solutions, which offer more growth and higher margins. Though, CSCO does have a ways to go – for its fiscal 2020, application software accounted for just 11% of Cisco's $49.3 billion in revenues.

Cisco does generate cash, though, and plenty of it. The company reported $15.4 billon of operating cash flow for 2020, off just a tad from 2019, reflecting (in part) revenues that aren't much better than what was reported in 2013. But the dividend has been growing like a weed, by about 11% annually since 2013.


Market value: $99.1 billion

Dividend yield (as of 1/1): 3.4%

Shares of 3M (MMM), among the Dogs of the Dow for yet another year in 2021, finished 2020 with a small 2.8% total return. And all of that positive territory can be attributed to its dividend.

3M, like most industrials, had a difficult year. Its second-quarter sales, for instance, declined by approximately $1 billion, or 12% year-over-year. Earnings, excluding the gain on the sale of its drug delivery business, were off more than 16.4%.

But the company is at least showing some signs of improvement. Third-quarter earnings, off by 10.7%, didn't decline as drastically, and 3M actually realized a 4.5% improvement in revenues. It's hard to tell how 2020 will finish, though – the company still won't provide quarterly or full-year estimates because of the difficulty in factoring in COVID effects.

While management is not offering any guidance, Value Line thinks 2020 sales will be flat, with earnings off 11%.

That said, the outlook is better for 2021. CFRA analyst Colin Scarola (Buy), for instance, says, "We see 3M outperforming the S&P 500's earnings recovery in 2021-2022, leaving strong upside for shares given their valuation discount to the index."

A 3.4% yield gives investors something to enjoy while they wait for this Dog of the Dow to mean-revert to the upside.


Market value: $243.5 billion

Dividend yield (as of 1/1): 4.3%

Verizon (VZ) isn't new to the Dogs of the Dow. It was a dog in 2019. And 2018. In fact, it has been part of this strategy going back at least to 2010.

Don't judge Verizon too harshly. It just pays a large dividend. And since 2010, Verizon shares have put together a respectable total return of a little more than 10% annually thanks to that large dividend. VZ hasn't delivered as much as the S&P 500's 13.7% return over that time, but it has produced its gains with a lot less drama.

One reason Verizon shares grow modestly is because telecom is a tough business. There's very little growth industrywide, so telecoms are largely relegated to stealing share from each other. To wit, Verizon is buying growth with the recently announced deal to acquire Tracfone for more than $6.2 billion, giving it a leg up in the prepaid space.

Buying revenues is nice, but it does not deliver the same punch to shares as organic industry growth.

But this Dog at least has the resources to continue paying its hefty dividend. Value Line rates the company "A++" – its highest rating – for financial strength, and believes the company will continue raising its dividend in 2021.

Walgreens Boots Alliance

Market value: $35.8 billion

Dividend yield (as of 1/1): 4.7%

The good news? Walgreens Boots Alliance's (WBA) 4.7% yield looks pretty safe. Its annual dividend of $1.87 per share accounts for just 39% of expected 2021 profits, and about 26% of cash flow.

The bad news is how we got to that yield.

WBA shares lost 29% on a total return basis in 2020. Investors feel that Walgreens faces a host of challenges including competition, flagging pharmacy sales, an unfavorable reimbursement environment for its distribution business, lower store traffic and COVID-related headwinds that management recently pegged at up to $1.06 for fiscal 2020 ended in August. (For context, total earnings for 2020 were just 52 cents per share, off 88% year-over-year.)

Walgreens showed some signs of life during the fourth quarter. Sales increased slightly, while earnings turned positive. And COVID vaccine distribution, as well as an overall increase in flu immunizations, might help 2021 results. But it could be a long wait. The nearly 5% yield will help soothe the pain.


Market value: $40.1 billion

Dividend yield (as of 1/1): 5.1%

Today's Dow (DOW) was created through the April 2019 spinoff of the company from DowDuPont, which itself was created from the 2017 merger of the original Dow and DuPont.

Currently, Dow sells specialty chemicals, polymers and related products to a broad range of industries. Sales and earnings took it on the chin in 2020, but shares traded essentially flat. Earnings were projected to fall from 2019's $43 billion to $38 billion in 2020. According to Value Line estimates, earnings per share (EPS) of $3.53 per share in 2019 are expected to plunge to $1.40.

Dow's woes are almost entirely pandemic-related. It serves a broad range of industries, which in normal times would offer the benefits of diversification. But most of the industries the company serves – consumer goods, construction, energy, personal care, packaging, textiles, automotive and telecommunications – have largely been hit by shutdowns to varying degrees.

And like most industrial stocks, return to growth in the global economy would offer a good setup for shares in 2021.

This is one of a few Dogs of the Dow that offer a payout of greater than 5%. While there's no such thing as a free lunch, investors still should give DOW a closer look. That payout, which is more than triple the S&P 500 at large, represents just 54% of cash flow per share, implying a good level of safety in the payout.

International Business Machines

Market value: $110.4 billion

Dividend yield (as of 1/1): 5.2%

If it were a movie, International Business Machines (IBM) could be called Honey, I Shrunk The Company. A decade ago, revenues were just a hair shy of $100 billion with about $15 billion in profits. For 2020, revenues will clock in at about $75 billion and profits are projected to be about $10 billion, according to Value Line estimates.

This shrinkage has been somewhat strategically executed, as IBM has been shedding noncore business to focus on what yields the best profits. In its latest deal, announced in October, IBM will spin off a portion of its services business to shareholders in a new company and sharpen its focus on hybrid cloud and AI solutions.

On the face of it, this looks like a good move as growth in the services businesses has been sluggish to negative, while the opposite holds true for cloud and AI.

But the devil is in the details, especially for dividend investors who don't want a lot of drama out of the Dogs of the Dow.

IBM has said "the companies together are initially expected to pay a combined quarterly dividend that is no less than IBM's pre-spin dividend per share." This means for investors to get the full $6.52 dividend in 2021 ($1.63 quarterly) they will need to hold onto their IBM shares as well as the spinoff shares they receive in the temporarily generically named "Newco."

This might not sit well with investors. After all, if IBM is lukewarm about tech services, why should you own it? However, if IBM has appropriately positioned itself to compete in cloud and AI, earnings growth might follow. Chatter on the street is that IBM's metamorphosis may well work, but patience is advised.

"IBM's efforts to transform itself are encouraging, but the tech giant's comeback probably will take time," Value Line's Theresa Brophy says.


Market value: $163.1 billion

Dividend yield (as of 1/1): 6.1%

Bankruptcies in the North American oil patch, at 45 in 2020, reached their second-highest level since oil was crushed six years ago. This gloom settled upon shares of Chevron (CVX), which delivered a -26% total return in 2020, putting it among the Dow's worst stocks.

That, and the resulting 6.1% yield, landed CVX in the basement of the doghouse in 2021.

Many companies have a complex set of reasons why business is off. But Chevron's issues are plain as day: The pandemic has dramatically reduced energy demand.

"A 22% reduction in demand for petroleum products in the United States over the summer illustrates the depth of the industry slump," says Ian Gendler, Value Line Executive Director of Research. "As a result, fourth quarter performance may not be much better than breakeven, and the company appears headed for a full-year loss."

A return to normalcy might be enough to lift Chevron's cloud in 2021. If so, a rise in shares would beautifully complement Chevron's eye-popping 6%-plus. There's some nervousness around its ability to maintain the payout, exacerbated by dividend cuts from fellow blue chips Royal Dutch Shell (RDS/A) and BP (BP). With an expected net loss for 2020 looming, these fears might have merit.

Even with a net loss, however, Chevron's estimated cash flow per share of $7.70 means the indicated $5.16 dividend is certainly doable, albeit somewhat tight.

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