The start of the year is a good time to add to your existing portfolio or start new positions. An excellent source to look for ideas is among the Dogs of the Dow. These stocks are the highest-yielding ones in the Dow Jones Industrial Average (DJIA) at the end of the preceding year.
The strategy assumes the stocks are temporarily mispriced, and thus the yields are high. Additionally, the Dogs of the Dow are blue-chip stocks with sustainable growth and excellent reputations. Hence, they make good picks for income investors.
We emphasize dividend yield, conservative payout ratio and valuation in our five picks. These five stocks make great choices for investors seeking higher yields at a reasonable price to generate dividend income.
Verizon (NYSE:VZ) continues to be a consistent theme in our selection because of the combination of nearly a decade-high dividend yield and significant undervaluation. Few stocks offer both at the same time.
For most of 2022, Verizon was challenged with growing its retail cellular subscribers. But a recent statement by the chief executive officer (CEO) suggests the trend may have reversed in 2023. Also, the firm is reducing capital spending and cutting expenses. This is good news, and investors bid up the stock price off its lows in response.
Still, the stock is yielding more than 6.5%, well above the five-year average and more than three times the dividend yield of the S&P 500. Verizon increases its dividend by about 2% annually and has done so for the past 19 years. The dividend is supported by a payout ratio of only about 49%.
Verizon is dirt cheap, trading at a price-to-earnings (P/E) ratio of only 7.7x, well below the 5-year and 10-year ranges. As a result, Verizon is an excellent choice for investors seeking income at a reasonable price.
Walgreens Boots Alliance (WBA)
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Walgreens Boots Alliance (NASDAQ:WBA) has been on the Dogs of the Dow annually since 2020 because of its recurring high dividend yield. The pharmacy retailer has struggled with low growth, opioid lawsuits and more competition. In addition, the 2015 merger between Walgreens and Boots Alliance caused difficulties.
That said, a new CEO is seemingly executing better. She also has a vision for expanding into healthcare. Along these lines, VillageMD recently acquired Summit Health for primary care, Shields for specialty care and CareCentrix for post-acute care. Whether this strategy will work or not, though, will take time to determine.
In the meantime, investors are paid to wait with a roughly 5.4% yield supported by a 42% payout ratio. Walgreens is not far from entering Dividend King status with 47 years of increases, but the dividend increase rate has slowed.
Walgreens is trading at a low earnings multiple of 7.9x, below the 5-year and 10-year ranges. However, despite the near-term difficulties, the company is consistently profitable.
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Intel (NASDAQ:INTC) is having one of its worst stretches since the dot-com boom between the company’s missteps and a changing competitive environment. The company has faced difficulties shrinking its fabrication lines to 7nm and 4nm, causing them to fall behind Taiwan Semiconductor (NYSE:TSM).
Next, the ARM-based chips produced by Advanced Micro Devices are eating into Intel’s PC and server market share. Intel designs and manufactures its own chips, while AMD designs and outsources manufacturing to TSMC. Lastly, clients are increasingly developing their own chips and outsourcing manufacturing to fabs like TSMC or Samsung.
The result has been shareholders selling Intel stock, and the stock price has dropped to levels last seen in 2014 to 2015. Simultaneously, the dividend yield has soared to more than 5%.
That said, Intel introduced Sapphire Rapids in its Xeon series of chips for data centers. Next, Intel’s impending launch of Intel 4, 7nm fabrication will make the firm’s chips more competitive versus AMD’s chips. Finally, Intel is spending tens of billions of dollars to expand its fab services with new plants in Arizona and Ohio.
Intel’s turnaround is still in the early stages, and the market hates the company, but the high demand for chips should be a tailwind. With the highest yield in a decade combined with a reasonable payout ratio of 51%, INTC stock is a solid choice.
International Business Machines (IBM)
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International Business Machines (NYSE:IBM) is another company investors love to hate. But the firm performed better than its peers in 2022, and momentum may continue into 2023. IBM started its turnaround in 2019 with the acquisition of Red Hat, moving definitively into hybrid cloud. Subsequently, a new CEO, followed by separating the managed infrastructure business into Kyndryl (NYSE:KD), has refocused the company.
Today, IBM is about software, consulting and mainframes. The firm is a leader in mainframes, hybrid cloud, transaction processing and global consulting. That said, IBM has room to improve revenue growth and margins.
The dividend yield of 4.7% is among the highest of the Dividend Aristocrats, making IBM attractive. The firm is committed to the dividend and is one of the longest-paying dividend stocks. Also, although the current raises are meager, IBM raises the dividend annually. IBM is undervalued compared to its peers based on the P/E ratio.
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Amgen’s (NASDAQ:AMGN) stock price continues to trend up after some weakness during the Covid-19 pandemic. The firm has several blockbuster drugs with billions of dollars in sales. But investors were worried about patent expirations and rising competition from biosimilars.
The company has dealt with challenges to its product portfolio by acquiring the oral immunology drug Otzela to complement Enebrel. Moreover, Amgen has pursued a strategy of acquiring smaller companies and gaining access to new molecules, compounds and therapies. Since 2021, Amgen has acquired ChemoCentryx, Tenebio and FivePrime Therapeutics in multi-billion-dollar deals.
Recently, Amgen announced the nearly $28 billion cash and debt deal for Horizon Therapeutics, growing the portfolio with the Tepezza blockbuster drug, several others with sales and a robust pipeline.
Amgen is yielding 3.2%, and the dividend is growing at a double-digit rate. Future growth is supported by a moderate payout ratio of 42%. The stock is probably fairly valued, but a successful acquisition of Horizon could mean future growth.
On the date of publication, Prakash Kolli held LONG positions in VZ, IBM and AMGN. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines. The author is not a licensed or registered investment adviser or broker/dealer. He is not providing you with individual investment advice. Please consult with a licensed investment professional before you invest your money.
Prakash Kolli is the founder of the Dividend Power site. He is a self-taught investor and blogger on dividend growth stocks and financial independence. Some of his writings can be found on Seeking Alpha, InvestorPlace, TalkMarkets, ValueWalk, The Money Show, Forbes, Yahoo Finance, FXMag, and leading financial blogs. He also works as a part-time freelance equity analyst with a leading newsletter on dividend stocks. He was recently in the top 1.0% and 100 (81 out of over 9,459) of financial bloggers as tracked by TipRanks (an independent analyst tracking site) for his articles on Seeking Alpha.