“In the markets you don’t take risk without being paid hard cash at the same time.”
-- Michael Lewis
Situation: The 10 “Dogs of the Dow” have the highest dividend yields in the 30 Dow Jones Industrial Average (DJIA) companies. Yields are high because the companies face challenges that have driven their share prices down. But high-quality companies tend to overcome challenges so you have an opportunity to profit.
Mission: Use our Standard Spreadsheet to analyze all 10 companies.
Execution: see Table.
Analysis: Warren Buffett’s favorite metric is addressed in Column R of the Table: Return on Tangible Capital Employed. He thinks anything over 20% is good. Three companies meet that standard (MRK, AMGN, MMM). His second point -- that the company be “run by able and honest managers” -- is addressed in Morningstar Reports (see Column AP) and is negatively impacted by the degree to which managers choose to capitalize the company by issuing long-term bonds rather than common stock (see Column X). Five companies (MRK, AMGN, VZ, INTC, MMM) have BUY ratings from Morningstar; 4 companies have Long-Term Debt to Equity ratios lower than 1.0 (MRK, INTC, CVX, DOW). Mr. Buffett has also stated that high Free Cash Flow Yield (Column I) reflects good management because Retained Earnings allow the company to expand (or pay down debt) at zero cost. Nine companies (MRK, AMGN, KO, INTC, WBA, CVX, MMM, IBM, DOW) have Retained Earnings after dividend payouts. His third point -- that the stock be available “at a sensible price” -- is addressed by the 1-yr and 5-yr Forward PEG ratios (see Columns M and N): Only one company has a PEG ratio under 2.0 at both time points (MRK). MRK and AMGN are also members of The 2 and 8 Club (Column J). There are 3 Value Stocks (VZ, INTC, WBA) per Columns AH to AM. That is, Price (50-day moving average) is no more than twice the Graham Number (Price normalized to 1.5 times Book Value and 15 times Earnings), 7-yr P/E is no more than 25, and Price is no more than 6 times Book Value. Two companies have 4 citations: MRK and INTC.
Bottom Line: These Dogs are the same as last year’s except that Intel (INTC) replaces Cisco Systems (CSCO). You would need to have invested equal amounts in all 10 of these Dogs at the first of the year to have a statistical likelihood of achieving Total Returns for 2022 that approximate those for the DJIA.
Risk Rating: 7 (where 10-yr Treasury Notes = 1, S&P 500 Index = 5, and gold bullion = 10)
Full Disclosure: I dollar-average into MRK, KO and INTC, and also own shares of VZ, MMM, IBM. KO and MMM are my largest holdings because those are the only Dividend Achievers (Column AT) on the list.
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