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Dow 'Dirty Dozen' Offers High Yields and Good Value

by: J Clinton Hill August 31, 2008 | about stocks: BAC / C / CNP / DIA / DUK / ED / GE / GM / IDU / IYJ / IYT / NI / PFE / SO / T / VZ    

J Clinton Hill

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Michael O’Higgins brought us the "Dogs of the Dow" strategy which he featured in his 1992 book, Beating the Dow. The basic premise of the strategy is selecting blue chip stocks which are out of favor but have a history of stable dividend policies and the ability to survive the troughs of any economic business cycle. For patient investors, the strategy has been profitable and able to outperform the Dow the majority of the time.

As a spin off and effort to broaden the number of blue chip candidates for screening, Hillbent combines the 30 Dow Industrials, 20 Dow Transportation, and 15 Dow Utility stocks to come up with the "Dirty Dozen". This group represents the 12 highest dividend yielding stocks amongst the Dow Jones 65 composite index.

It should come as no surprise that auto manufacturing and financials represent the 3 highest yielding stocks. GM’s (GM) gut wrenching restructuring decisions will posiiton it be a dominant player in the global and emerging markets. Note that the American market is just a battle while the global and emerging markets represent the war.  Bank of America (BAC) and Citigroup (C) may still be vulnerable to further writedowns but will also grow market share from less industry competition. Pfizer (PFE) struggles with a dwindling drug pipeline and patent expirations and has prioritized a strategic acquisition or joint partnership in order to maintain its competitive edge. Defensive stocks like Telecom (AT&T (T) and Verizon (VZ) and Utility (Consolidated Edison (ED), NiSource (NI), Duke Energy (DUK), The Southern Company (SO), CenterPoint (CNP)) companies generate sufficient cash flow and maintain fairly low payout ratios to make them a safe bet for shelter in just about any economic storm. Last but not least, is the mighty conglomerate GE which also has a conservative payout ratio and stands to benefit from global infrastructure development and a weaker dollar.

Collectively, the group averages a 5.88% yield, and while it lacks broad enough industry diversification to comprise an entire portfolio, a basket of these stocks could serve as a core holding for conservative to moderate investors and absorb the shocks of the rough and bumpy bear market trail upon which market participants now must travel.

 

Company Ticker Last Div Yld Payout Ratio
General Motors GM 10.07 9.67 N/A
Bank Of America BAC 31.03 8.15 1.38
Citigroup Inc C 18.87 6.71 N/A
Pfizer Inc PFE 19.26 6.64 0.57
Consol. Edison ED 41.39 5.63 0.73
NiSource Inc NI 16.62 5.50 0.71
Duke Energy
DUK 17.70 5.16 0.64
AT&T Inc T 32.75 4.96 0.55
Verizon Comm. VZ 35.82 4.85 0.68
CenterPoint Energy CNP 15.97 4.52 0.58
Southern Company SO 37.86 4.42 0.71
General Electric GE 28.68 4.30 0.57
         
Average   25.50 5.88 0.71

 

Disclosures: Hillbent nor any of its affiates maintains a long or short position in any of the above mentioned securities and nor does it not receive any form of compensation as a result of an investment banking or any other type of professional or informal relationship.

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This article has 8 comments:

  •  
    Aug 31 10:00 AM
    Remember the most important point of high yielding stocks. Dividends are the first thing to be cut in troubled times for the markets. Look at GM, C, WB and others for example, all of whom slashed or eliminated their dividends. All these issues are being manipulated.

    For more information click on my web link and read how it is done.

    Richard
    Reply
  •  
    Aug 31 03:43 PM
    Actually, dividends are NOT the first thing to be cut, which is the problem. But they almost inevitably will be cut, after trapping an entire class of yield-chasing investors. You have to decide if you trust management when they deny a dividend cut is in the cards.
    Reply
  •  
    Aug 31 05:08 PM
    So what is ?
    Reply
  •  
    Sep 01 11:11 PM
    PFE & GE would be my top picks from that group. I would not count on GM being a "yield" investment for quite some time due in part to the risks they face on many fronts. Chronic mismanagement vs. yield? I'll avoid that stocks as a value trap despite the upside many analysts and investors continue to see in that company
    Reply
  •  
    Sep 02 12:01 PM
    Yawn. You guys will be here in another 6 months predicting the "inevitable" cut in Bank of America's dividend. Meanwhile, I'll continue to collect $0.64 per share every three months.

    Thanks for the laughs.
    Reply
  •  
    Sep 02 03:01 PM
    Re Nurseb911's comment, in addition to Pfizer and GE, I would also pick Bank of America among the high yielding stocks. In addition, I'd pick JP Morgan Chase. I believe both banks have reasonably strong balance sheets and are well positioned to pick up market share.
    Reply
  •  
    Sep 07 05:47 PM
    Tomorrow will be street's best day of the year.
    I am well positioned
    VS MBI SGEN ZGN CRXX AAPL
    Reply
  •  
    Oct 16 10:17 AM
    I would not count on GM being a "yield" investment for quite some time due in part to the risks they face on many fronts.
    Reply
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