For most investors, 2022 was a difficult year. All three major U.S. indexes fell into a bear market and produced their worst returns since 2008. Unless you were heavily invested in the one sector of the market that performed well (energy), you were probably taken along for the ride.
But not all of the major indexes performed equally. Whereas the technology-dependent Nasdaq Composite shed a third of its value, the 30-component Dow Jones Industrial Average (^DJI +0.56%) ended 2022 lower by just 9%. Because the Dow Jones is packed with generally profitable, mature, multinational businesses, it was the perfect safe haven for investors in a challenging year.
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The Dow is also home to a long list of dividend stocks. Currently, 27 out of 30 Dow components are rewarding their shareholders with a quarterly dividend. Among these 27 income stocks are five companies with high-yield payouts (i.e., yields of 4% or above).
Two of these high-yield Dow stocks are jaw-droppingly cheap and screaming buys right now, while another perceived-to-be cheap Dow component is worth avoiding.
High-yield Dow stock No. 1 that's a screaming buy right now: Verizon Communications (6.61% yield)
The first high-yield Dow Jones Industrial Average stock that stands out as a no-brainer buy right now is telecom stock Verizon Communications (VZ 0.41%). Verizon's 6.6% yield is the highest in the Dow and very close to the highest yield it's supported as a publicly traded company.
If there's a knock against telecom stocks, it's that their high-growth days are long gone. When the Federal Reserve kept lending rates at or near historic lows for more than a decade, it fueled fast-paced businesses while leaving mature companies, like Verizon, to be largely forgotten. However, bear markets have a knack for putting highly profitable, dividend-paying value stocks back on investors' radars.
NYSE: VZ
Key Data Points
Even though Verizon isn't going to wow Wall Street with its organic growth rate, the company does have two very clear tailwinds. The most obvious is the steady move to 5G networks. Despite infrastructure upgrades being costly, 5G should encourage a steady device replacement cycle, as well as an increase in data consumption. The latter is where Verizon generates a sizable chunk of its wireless operating margin.
The other key catalyst for Verizon is the recent surge in broadband net additions. Verizon invested a pretty penny to acquire mid-band spectrum to be used for 5G at-home and business-focused broadband. These investments are paying off, with total broadband net additions of 416,000 in the fourth quarter, representing the highest single quarter of net adds in more than a decade. The best aspect of broadband is that it encourages service bundling, which tends to boost Verizon's operating margin.
The bottom line with Verizon is that its operating cash flow tends to be highly predictable. Wall Street and everyday investors love profitable, high-yield, predictable businesses when volatility and uncertainty are ruling the roost on Wall Street. Priced at only 8 times Wall Street's forecast earnings for the company in 2023 and 2024, Verizon would appear to offer a safe floor, with steady long-term upside.
NASDAQ: WBA
Key Data Points
High-yield Dow stock No. 2 that's a screaming buy right now: Walgreens Boots Alliance (5.37% yield)
The second high-yielding Dow stock that's a screaming buy at the moment is pharmacy chain Walgreens Boots Alliance (WBA +0.00%). Walgreens has increased its annual payout for 47 consecutive years and is currently parsing out a 5.4% yield.
Whereas investor apathy has been largely responsible for making Verizon such an attractive stock for value seekers, Walgreens can blame the COVID-19 pandemic. Since it generates most of its revenue from brick-and-mortar stores, initial COVID-19 lockdowns hurt its front-end retail sales, clinic revenue, and even pharmacy sales to some extent. Thankfully, this short-term pain is investors' long-term opportunity.
Instead of fighting the proverbial current, Walgreens Boots Alliance's management team viewed their company's struggles during the pandemic as a wake-up call. One of the changes being made is a focus on digitization initiatives. In addition to completely revamping its supply chain, Walgreens is building out its direct-to-consumer shopping experience.
The pandemic demonstrated how important convenience has become to consumers. An ample online retail presence should be an easy way for Walgreens to deliver healthy organic sales growth.
Another big post-pandemic change is Walgreens pushing heavily into a new vertical: healthcare services. As of Feb. 28, Walgreens and VillageMD (Walgreens is a majority investor in VillageMD) had opened 210 full-service VillageMD health clinics colocated in Walgreens' stores. The key to these clinics is they're physician staffed and capable of handling more ailments than a traditional pharmacy walk-in clinic. The expectation is these clinics will drive repeat visits, which is why Walgreens and VillageMD anticipate operating 1,000 of them by the end of 2027.
Similar to Verizon, Walgreens Boots Alliance also offers a relatively safe floor, with a forward-year price-to-earnings ratio of just 7. Walgreens has the potential to double patient investors' money over the next five years.
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The high-yield Dow stock that isn't worth your hard-earned money: IBM (5.06% yield)
On the other end of the spectrum is a time-tested, high-yield Dow stock that investors would be wise to avoid. I'm talking about tech stalwart IBM (IBM 0.71%).
To be completely fair, IBM is a consistently profitable company. Following its spinoff of tech-services company Kyndryl Holdings in the fourth quarter of 2021, IBM has been able to focus its attention on becoming a leader in hybrid-cloud solutions. The hybrid cloud is more important than ever in a post-pandemic environment, where more people are working remotely. The company's artificial intelligence (AI) and hybrid cloud-driven enterprise software solutions have delivered reasonably strong growth.
NYSE: IBM
Key Data Points
However, IBM has a long way to go to shake off the proverbial rust of being late to the cloud-computing party. While acquisitions have helped the company partially close the gap with its peers, sales growth has been difficult to come by. Kyndryl's legacy solutions were a consistent revenue drag for years. Even with Kyndryl as a separate company, sales growth remains in the low single digits.
IBM is also facing a number of headwinds that could come into play if recession-probability indicators prove accurate and the U.S. dips into a recession. For example, IBM's consulting segment is reliant on larger businesses, which would be hurt by economic weakness. Further, the company generates quite a bit of its sales overseas, which leaves it exposed to foreign currency movement.
Among the Dow's high-yield stocks, IBM would be, in my view, the most adversely impacted if a U.S. or global recession takes place.
Something else to consider is that IBM isn't all that cheap, given the multiyear sales decline it endured. Even though its sales needle is now pointing very modestly higher, paying 14 times Wall Street's forecast earnings for 2023 isn't necessarily a great value when IBM's sales growth rate is below 4%.
IBM does have the tools to eventually become a stock investors can confidently buy into again, but it's simply not there yet.
