We recently compiled a list of the 10 Dogs of the Dow Dividend Stocks to Invest in. In this article, we are going to take a look at where International Business Machines Corporation (NYSE:IBM) stands against the other dividend stocks.
Dividend-focused investors are often drawn to stocks with high yields, shaping their strategies around acquiring such investments. A notable approach is the Dogs of the Dow (DOD) strategy, which involves selecting the 10 highest dividend-yielding stocks from the Dow Jones Industrial Average (DJIA) each year. This method operates on the belief that these so-called “Dogs” are either undervalued or out of favor. By targeting these stocks, investors hope to benefit from potential price appreciation while also securing a steady stream of dividend income. The strategy is based on the idea that these high-yield stocks are merely temporarily undervalued and are likely to recover shortly.
Numerous financial experts have provided detailed explanations of the strategy to help investors develop a thorough understanding of it. Robert R. Johnson, professor of finance at the Heider College of Business at Creighton University, spoke about the Dogs in one of his interviews with Business Insider. Here are some comments from the analyst:
“The underlying premise behind the strategy is mean reversion. The [Dogs of the Dow] is based on the theory that stocks can be over or undervalued, but over the long run those that are undervalued will ‘revert to the mean.”
Dow stocks are typically not inexpensive without reason. These companies rarely face the risk of going out of business, and their high yields often result from falling out of favor. According to a report by Forbes, historically, the Dogs have delivered strong long-term performance, but their recent results have been mixed. While they lagged behind the broader market in 2019, 2020, and 2021, they surged ahead in 2022, only to underperform again in 2023.
Also read: 10 Best Mid-Cap Dividend Aristocrats To Buy
However, over the long term, the strategy has managed to outperform its benchmark. Michael O’Higgins found that over a 26-year period, a theoretical portfolio made up of high dividend-yield stocks from the Dow Jones delivered an annualized return of 17.9%. This performance exceeded the Dow Jones Industrial Average’s annualized return of 13% during the same timeframe.
A study in the International Journal of Trade, Economics, and Finance analyzed various versions of the DOD strategy and found that they consistently outperformed the DJIA on a risk-adjusted basis. The research explored three DOD variations: Dow-10, Dow-5, and the “Small Dogs of the Dow,” while incorporating recent market events like the 2001 dot-com bubble, the 2008 financial crisis, and the subsequent recovery. The study revealed that all three strategies delivered better investment performance than the DJIA between 1996 and 2006. Notably, the traditional Dow-10 portfolio achieved a total return of 406.6% during this time, surpassing the DJIA’s return of 355.6%.
Despite the strong performance of the Dogs, analysts caution investors to approach this strategy with care. Kevin Simpson, founder and chief investment officer at Capital Wealth Planning, made the following comment in one of his interviews with CNBC:
“The idea here is that just because they’re ‘Dogs of the Dow’ — some of them really are dogs — and you have to be careful and selective as a stock picker.”
Our Methodology:
We began with a pool of 30 stocks from the Dow Jones Industrial Average (DJIA) and identified dividend-paying stocks from this selection. As a majority of the stocks in the index offer dividends, we specifically picked the 10 stocks with the highest dividend yields as of December 17. The stocks are ranked in ascending order of their dividend yields. We also considered hedge fund sentiment around each stock using Insider Monkey’s data for Q3 2024.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points. (see more details here).
A closeup of a woman’s hands typing rapidly on a laptop in a corporate office setting.
International Business Machines Corporation (NYSE:IBM)
Dividend Yield as of December 17: 2.92%
An American multinational tech company, International Business Machines Corporation (NYSE:IBM) ranks seventh on our list of the best Dogs of the Dow dividend stocks. The company focuses on developing business-class systems tailored for use by other organizations. It continues to design AI platforms with robust security measures, clear audit trails to trace the origin of generated data, and other features specifically designed to meet business needs. The stock has been delivering strong earnings since the start of 2024, surging by over 41.6%.
In the third quarter of 2024, International Business Machines Corporation (NYSE:IBM) reported $15 billion in revenue, representing a modest 1.46% growth compared to the same period last year. This growth was largely driven by strong results in the Software segment, including a recovery in Red Hat. The company’s generative AI business exceeded $3 billion in revenue, showing a quarter-over-quarter increase of over $1 billion. For the fourth quarter, IBM expects constant currency revenue growth to align with third-quarter levels, supported by sustained strength in the Software segment. Management remains confident in achieving over $12 billion in free cash flow for the year, supported by further improvements in operating margins.
International Business Machines Corporation (NYSE:IBM) maintains a strong cash position, generating $9.1 billion in operating cash flow in the latest quarter, with free cash flow totaling $6.6 billion. The company also returned $1.5 billion to shareholders through dividend payments. IBM offers a quarterly dividend of $1.67 per share, with a dividend yield of 2.92%, as of December 17. The company has consistently increased its dividends for 29 consecutive years.
International Business Machines Corporation (NYSE:IBM) was a part of 56 hedge fund portfolios at the end of Q3 2024, up from 54 in the previous quarter, according to Insider Monkey’s database. The stakes held by these funds have a collective value of over $1.73 billion.
Overall IBM ranks 7th on our list of the best dogs of the Dow dividend stocks. While we acknowledge the potential of IBM as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than IBM but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
READ NEXT: 8 Best Wide Moat Stocks to Buy Now and 30 Most Important AI Stocks According to BlackRock.
Disclosure: None. This article is originally published at Insider Monkey.