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 Johnson & Johnson (NYSE:JNJ) 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 smiling baby with an array of baby care products in the foreground.
Johnson & Johnson (NYSE:JNJ)
Dividend Yield as of December 17: 3.40%
Johnson & Johnson (NYSE:JNJ) is a New Jersey-based pharmaceutical company that specializes in a wide range of biotech and medical products and offers related services to consumers. The company has steadily expanded its portfolio through various acquisitions. Its latest purchase was the medical device company V-Wave, with an initial payment of $600 million. The deal also includes potential milestone payments that could total up to $1.1 billion, contingent on regulatory approvals and commercial successes.
Johnson & Johnson (NYSE:JNJ) reported strong earnings in the third quarter of 2024, with revenues reaching $22.4 billion, reflecting a 5.25% increase compared to the same period last year. For the first nine months of the year, the company generated $14 billion in free cash flow, up from $11.9 billion in the previous year. It has revised its 2024 guidance, including adjusted operational earnings per share (EPS), to account for stronger performance and the effects of its recent acquisition of V-Wave. The company now expects adjusted operational sales to grow between 5.7% and 6.2%, with a midpoint of 6.0%.
Johnson & Johnson (NYSE:JNJ) is a strong dividend payer, having raised its payouts for 62 consecutive years. The company currently offers a quarterly dividend of $1.24 per share for a dividend yield of 3.40%, as of December 17.
As per Insider Monkey’s database of Q3 2024, 81 hedge funds held stakes in Johnson & Johnson (NYSE:JNJ), up from 80 in the preceding quarter. These stakes are collectively valued at over $5.4 billion.
Overall JNJ ranks 4th on our list of the best dogs of the Dow dividend stocks. While we acknowledge the potential of JNJ 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 JNJ 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.
