Dividend stocks in the S&P 500 and Dow Jones Industrial Average disappointed this year. But analysts think some high yielding Dow stocks are still worth a bet next year — and ETFs can help manage the risk.
Five so-called "Dogs of the Dow" stocks, including Altria Group, Walgreens Boots Alliance, Verizon Communications and AT&T, are poised to rise 10% or more in the next 12 months on top of their dividend yields of 6% or more, says an Investor's Business Daily analysis of data from S&P Global Market Intelligence and MarketSmith. That would be a stellar run for some of the Dogs of the Dow — the 10 stocks with the highest dividend yields going into a new year.
Dividends dimmed in 2023. Why buy dividend stocks when you could get 5% yields from buying 10-year Treasuries? "We just lived through a rapidly rising interest rate environment where money market funds and ultra short bond ETFs offered 5% yields nearly risk free," said Todd Rosenbluth of Vetta Fi.
But analysts still think the odds are good for some dividend stocks and ETFs. "As yields fell in recent weeks, dividend ETFs that offer income and capital appreciation potential should be more appealing," Rosenbluth said.
Investors Down On Dividends
Dividend stocks essentially wiped out their strong 2022 this year. The SPDR Portfolio S&P 500 High Dividend ETF is down nearly 5%, erasing its 4.8% dividend yield. That seriously lags the S&P 500. The S&P 500 only yields 1.6%, but rocketed 21% this year.
But don't think this is just a narrow or recent phenomenon. S&P 500 stocks that pay a dividend are up just 0.81% on average this year, says Bespoke Investment Group. Meanwhile, stocks paying no dividends are up 19% on average.
The Dogs of the Dow tell a similar story of woe for dividend stocks. The Dogs of the Dow in 2023 are up an average of just 2.8%, lagging the market by the widest amount since 2006, Bespoke says. But more importantly, the Dogs of the Dow trailed the market in four of the past five years, Bespoke found.
Playing Dividends With ETFs
It's possible to bet on a dividend comeback with individual high-yielding stocks. Chevron is the favorite of analysts for the next year. The energy stock yields 4.2%, or many times higher than the S&P 500. Meanwhile, analysts think the stock has 26% upside in the next 12 months. That's the highest implied upside of any of the Dogs of the Dow for 2024.
But getting it wrong can sting. Shares of the highest yielding Dog of the Dow in 2023 at 6.6% — Verizon — dropped 7%, in 2023.
And that's why dividend ETFs can make sense. They reduce the risk of picking the wrong individual stock. The $6.6 billion-in-assets SPDR Portfolio S&P 500 High Dividend ETF is an option, Rosenbluth says. It sports a yield of 4.8%. And it exposes your portfolio "more in financials, real estate and utilities sectors that were out of favor in 2023," Rosenbluth says. It charges just 0.07% annually. Chevron is a 1.2% piece of the ETF's portfolio.
Another option is ALPS Sector Dividend Dogs. The ETF equal weights the five stocks in each of the 11 S&P 500 sectors with the highest dividend yields. It's kind of a modified Dogs of the Dow. The result is a fund yielding 4.3% that fell just 3.7% in 2023. It charges 0.36% annually.
Alternatives To Dividends
Given how poorly dividend stocks have done, investors might consider alternatives. A rising number of ETFs use covered calls to generate income, Rosenbluth says. JPMorgan Equity Premium Income ETF yields 11.7% and is up nearly 1% this year. And Amplify CWP Enhanced Dividend Income ETF yields 4.8% and is only down 0.5% this year.
"Covered call ETFs ... offer a strong alternative to traditional dividend ETFs," he said. "They provide more downside protection, while offering strong income generation."
Dividend Dogs Of The Dow?
Highest yielding Dow stocks sorted by analysts' 12-month price targets
| Company | Ticker | Yield now % | Upside to target |
|---|---|---|---|
| Chevron | 4.2% | 26.1% | |
| Walgreens Boots Alliance | 8.4 | 15.9% | |
| Cisco Systems | 3.2 | 11.1% | |
| Verizon Communications | 7.1 | 10.6% | |
| Dow | 5.5 | 10.0% | |
| 3M | 5.9 | 9.5% | |
| Coca-Cola | 3.1 | 7.9% | |
| Goldman Sachs | 3.1 | 7.1% | |
| Amgen | 3.1 | 0.7% | |
| International Business Machines | 4.0 | -7.8% |
