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Dogs of the Dow: AT&T, Verizon, Merck & Co, DuPont , Kraft Food

Dogs of the Dow: The 5 higher yielders

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Sep 25, 2009
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"The Dogs of the Dow strategy has a long-term history of outperforming the Dow Jones average," notes technical expert Gerald Appel.

In his Systems & Forecasts, he explains, "The theory is that the highest yielding stocks are undervalued and should have the greatest change of appreciating." Here, he reviews the 5 highest yielders.

"In calculating a formal track record for the strategy, dividend yields are ranked on the last trading day of each year. However, there is no reason why you are limited to ranking stocks only at the end of the year.

"The current market climate appears favorable for using this strategy to garner investment income, since market risk appears below normal and investment income is getting hard to come by.

"I would caution that dividends paid by stocks in the S&P 500 have shrunk by 25% in the past 12 months; this is the worst fall-off in dividend payments since the 1040s. 

"In light of this, you can no longer simply assume that companies in the Dogs of the Dow will maintain their dividend. You should also attempt to verify that companies are earning enough to continue to pay their stated dividends before buying a stock. 

"Below, I provide some dividend outlook for the tend stocks currently ranked as the Dogs of the Dow:

"AT&T (T, Financial) is in strong financial condition. Its earnings have consistently beaten what it pays out in dividends by more than a third. Most recently, quarterly earnings of $0.56 a share covered a dividend of $0.41 a share. 

"The question is not whether AT&T can continue to pay its dividend. Rather, the question is how much that dividend can grow, since telecom is a commodity business with a lot of competition in the wireless space.

"Verizon (VZ, Financial) is another stock that is earning enough to cover its dividend. The quarterly payout is $0.46 a share and earnings for the past two quarters were $0.58 and $0.51. Analyst opinion on telecoms generally is lukewarm, and Verizon is no exception.

"Both AT&T and Verizon currently trade at prices that in the past 13 years would have been good buying areas.

"My recommended strategy would be to buy T at prices under $26 a share and VZ at proices under $31. If they should rally, take profits at $40 a share. Otherwise, ride out the fluctuations and collect the dividends.

"Merck & Co. (MRK, Financial) has consistently eerned about double what it pays out in diviends. Most recently, its second quarter dividend of $0.38 was easily covered by earnings of $0.74 a share.

"The problem with major pharmaceuticals generally is that their stocks are in long-term downtrends. However, MRK currently appears to have formed a nice bottom in the $26-$30 area, supported by heavy volume. The $26 a share area has historically been a good buying place for Merck.

"This looks like a good stock to hold for the long-term, riding the ups and downs while collecting the dividend income. However, don't expect long-term capital appreciation beyond the inflation rate and the rate of growth of the elderly population.

"DuPont (DD, Financial) is yielding 5.8% and in both the first and second quarters has covered the $0.38 a share dividend with earnings of $0.54 and $0.46. This is an improvement over last year, when earnings did not cover the payout.

"DuPont spend much of this decade in a trading range of $39 to $51. The stock made new lows in early 2009 but has mostly recovered, rising 100% off its March low. It appears to face potential resistance at $39. 

"I am concerned that this once-quiet stock increased its volatility in 2008-2009. Nonetheless, if you expect the economic recovery to continue (as I do), then this one should be good to hold for its dividend and -- I expect -- renewed price stability.

"Kraft (KFT, Financial) has been easily able to cover its $0.29 quarterly dividend payout with earnings of $0.45 during the first quarter and $0.54 in the second quarter.

"In the past eight years, the shares have moved sideways while the dividend payout has more than doubled. In fact, the shares now trade at the lower end of the $2.7.50-$36 trading range that has been in effect for most of the past six years.

"I expect a long-term realignment towards lower consumer spending in the US.However, since Kraft is in the defensive consumer staples sector, it should hold up well in the face of such a realignment.

"Kraft is a reasonable holding for conservative investors looking for ongoing dividend income. Eventually, the growth in dividends should lead to some capital appreciation."

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