Month 152 - 20 Profitable Large-cap Dividend Achievers in the Dow Jones Composite Average - March 2024

Situation: The U.S. stock market lacks clear direction going forward. Investors will need to eschew risk and take a balanced position between growth stocks, bond-like stocks, and investment-grade bonds. That means giving increased attention to the Dow Jones Composite Average–where many companies issue stocks with good and growing dividends.

Mission: Use our standard spreadsheet to analyze companies in the 65-stock Dow Jones Composite Average, selecting those that 1) are included in the Russell Top 200 Index 2) are listed in the Vanguard Dividend Appreciation ETF, 3) have a 10-yr Actual Rate of Return that exceeds their 10-yr Required Rate of Return (Columns D&E) or a Return on Tangible Capital Employed (Column T) of at least 20%, 4) issue bonds rated BBB+ or better by S&P, and 5) have an S&P stock rating of B/H or higher.

Execution: see Table of 20 stocks.

Analysis: Warren Buffett’s favorite metric is Return on Tangible Capital Employed (see Column T in the Table). He thinks a 20% return for the last fiscal year is a good number. Eleven companies qualify: MRK, UNH, KO, V, HON, JNJ, PG, MSFT, AAPL, HD, UPS. His second point (that the company be “run by able and honest managers”) is addressed in Morningstar Reports (Column AP) and negatively impacted by the degree to which those managers capitalize the company by issuing long-term bonds (Column Z). Three companies have a BUY rating from Morningstar (HON, MCD, NEE), and 9 have a Debt to Equity ratio lower than 1.0 (MRK, TRV, UNH, V, JNJ, WMT, PG, MSFT, CSCO). Mr. Buffett also likes Free Cash Flow Yield (Column K) to be higher than the Dividend Yield (Column J), since Retained Earnings allow the company to expand operations (or pay down debt) at zero cost; 18 companies qualify (MRK, CAT, TRV, UNH, KO, V, HON, MCD, JNJ, WMT, PG, MSFT, AAPL, JPM, CSX, UNP, HD, CSCO). His third point (that the stock be available “at a sensible price”) is addressed by 1-yr and 5-year Forward PEG ratios (Columns O and P); 8 companies have PEGs under 2.5 at both intervals (MRK, TRV, UNH, V, HON, MCD, NEE, MSFT). Eight companies are A-rated (Column AQ): MRK, CAT, TRV, JNJ, WMT, NEE, PG, UNP, CSCO. Nine companies are cited 4 times (MRK, TRV, V, HON, MCD, JNJ, PG, MSFT, CSCO)

Bottom Line: DJCA companies are selected by a committee of Wall Street professionals to represent profitable leaders in 10 of the 11 S&P industries (Real Estate being excluded, but McDonald’s profits come mainly from rental income). 

Risk Rating: 6 (where 10-yr U.S. Treasury Notes = 1, S&P 500 = 5, and gold bullion = 10)

Full Disclosure: I dollar-average into 14 stocks (MRK, CAT, KO, MCD, JNJ, WMT, PG, NEE, MSFT, JPM, UNP, HD, UPS and CSCO), and also own shares of UNH, HON, V and CSX.

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