Which stocks will investors howl for in 2025?

One person's trash is another person's treasure, or so the old adage goes—a fitting perspective for the Dogs of the Dow strategy. After a year of underperformance in 2024, the so-called Dogs may look like castaways to some, but to value and income-focused investors, they could represent some of the most intriguing opportunities for 2025. By targeting the ten highest-yielding stocks within the Dow Jones Industrial Average, this straightforward strategy not only banks on steady dividends but also wagers on the potential rebound of undervalued blue-chip stocks. With the turn of the calendar, the Dogs that were overlooked last year could be poised to surprise as they regain their footing in the market.

The Dogs of the Dow thrive on the principle of mean reversion, assuming that companies beaten down in price yet rich in yield have the potential to recover to their intrinsic value. For 2025, this strategy may hold even more allure, as the dividend stalwarts within the Dow offer both income stability and the possibility of capital gains in an unpredictable market. Whether you're a seasoned investor or new to the game, the Dogs of the Dow remind us that diamonds can often be found in the rough.

The Strategy

The Dogs of the Dow is a straightforward dividend-focused investment strategy that involves selecting the ten highest-yielding stocks from the Dow Jones Industrial Average (DJIA) at the end of each year. The approach operates on the assumption that high dividend yields often signal undervaluation. When a stock's price declines relative to its dividend payout, its yield increases, potentially highlighting opportunities for price recovery while providing steady income.

This strategy benefits from the stability and reliability of the Dow's blue-chip companies. The DJIA consists of 30 large, well-established firms known for their financial strength and consistent dividend payouts. By focusing on the highest-yielding stocks within this index, the Dogs of the Dow leverages the inherent stability of these large-cap companies.

A key premise of the strategy is mean reversion. It assumes that undervalued high-yield stocks will eventually see their prices recover to align with their fundamental value. This recovery not only offers the potential for capital gains but also complements the income derived from dividends, creating a dual benefit for investors.

One of the major appeals of the Dogs of the Dow is its simplicity. At the start of each year, investors identify the ten highest-yielding stocks in the Dow, invest equal amounts in each, and hold them for one year. At the year's end, the portfolio is rebalanced by replacing stocks that no longer qualify with new entrants to the top ten. This disciplined approach minimizes subjective decision-making and keeps the strategy easy to implement.

Additionally, the strategy requires minimal maintenance. Its passive nature reduces trading costs and the need for frequent monitoring, making it particularly attractive to income-focused and long-term investors. This simplicity and low maintenance align well with investors seeking a consistent and predictable method to invest in large-cap dividend-paying stocks.

However, the strategy does have limitations. It does not account for other financial metrics such as earnings, growth prospects, or debt levels. This narrow focus on dividend yield might inadvertently include companies in declining industries or facing financial challenges, which are sometimes referred to as "value traps."

By targeting high-yield, blue-chip stocks in the Dow, the Dogs of the Dow aims to combine the potential for capital appreciation with reliable dividend income. Its focus on undervalued, stable companies makes it a compelling option for conservative investors who prioritize income and long-term value.

The Candidates

As of December 4, 2024, the following companies are the leading candidates for the 2025 Dogs of the Dow, based on their current dividend yields:

Verizon Communications Inc. (VZ): Yield 6.8%; YTD +13.5%; Forward P/E 9.03x

In 2024, Verizon Communications reported steady increases in operating revenue and subscriber growth, with its Consumer segment achieving its seventh consecutive quarter of year-over-year growth in postpaid phone gross additions. These results underscored the strength of its wireless and broadband services. A standout development was Verizon's $20 billion agreement to acquire Frontier Communications, aimed at significantly expanding its fiber footprint and enhancing premium mobility and broadband offerings. In addition, Verizon partnered with AST SpaceMobile to advance satellite-to-cell capabilities, addressing connectivity gaps in remote areas.

Despite these advancements, Verizon faced challenges, including a cybersecurity breach reportedly linked to Chinese government-affiliated hackers targeting sensitive data. The company also focused on improving customer experience by introducing flexible, value-driven broadband and mobile plans. While navigating these hurdles, Verizon maintained its commitment to innovation and operational growth, as reflected in its stock performance, which closed the year at $42.70. These efforts collectively marked 2024 as a pivotal year of transformation and progress for the telecommunications giant.

The 200-day moving average on the monthly chart indicates that the $45 level is a key resistance point that investors need to see breached. Meanwhile, strong support exists in the $39-40 range, providing a well-defined risk level. At 9x earnings, VZ stands out as a great value play with a healthy yield return.

International Business Machines Corp. (IBM): Yield 3.9%; YTD +42.4%; Forward P/E 21.71x

In 2024, IBM was picked up late as an AI play, leading to a second half surge in the stock. It achieved revenue growth across all segments. The company reported a 4% year-over-year increase in fourth-quarter revenue, reaching $17.4 billion, with software, consulting, and infrastructure segments all contributing to this growth.  Notably, the software segment experienced a 9.7% increase, driven by the success of Red Hat, which saw a 14% revenue rise.  IBM's generative AI initiatives gained significant traction, with a book of business exceeding $3 billion, reflecting the company's commitment to integrating AI into its offerings. 

Strategic partnerships played a crucial role in IBM's 2024 agenda. The company collaborated with industry leaders such as Adobe, AWS, SAP, and Salesforce to enhance its technological capabilities and market reach.  A significant development was the $6.4 billion acquisition of HashiCorp, aimed at bolstering IBM's cloud management offerings and facilitating automation across multiple cloud platforms.  Additionally, IBM partnered with Palo Alto Networks to develop AI-powered cybersecurity solutions, addressing the growing complexity of cyber threats.  These strategic moves underscore IBM's dedication to innovation and its proactive approach to meeting evolving client needs in the digital era.

There are concerns that IBM may be over extended but its forward P/E valuation is in line with markets and lies below other AI peers. The $233 area lines up as a key level as a rejection at this area could lead to worries around a double top. We would expect this to breach that resistance and push higher but there will be some operational risks that investors need to monitor.

Chevron Corp. (CVX): Yield 4.3%; YTD +6.2%; YTD +42.4%; Forward P/E 13.89x

In 2024, Chevron Corporation (CVX) navigated a complex landscape of fluctuating oil prices and strategic corporate developments. The company reported a net income of $4.5 billion for the third quarter, down from $6.5 billion in the same period the previous year, primarily due to lower oil and gas prices and weaker refining margins.  Despite these challenges, Chevron achieved record production levels, notably increasing U.S. output by 14%, driven by operations in the Permian Basin and the acquisition of PDC Energy.  This operational success enabled the company to return a record $7.7 billion in cash to shareholders during the third quarter. 

Strategically, Chevron announced the relocation of its headquarters from San Ramon, California, to Houston, Texas, aiming to align more closely with its core operations and the favorable business environment in Texas.  The company also planned to invest $16 billion in capital expenditures for 2024, with a significant portion allocated to U.S. upstream operations, underscoring its commitment to domestic energy production.  However, Chevron faced legal challenges, including a Federal Trade Commission (FTC) decision that approved its $53 billion acquisition of Hess Corporation but barred Hess's CEO from joining Chevron's board due to antitrust concerns.  Overall, 2024 was a year of operational achievements and strategic shifts for Chevron, as it adapted to market dynamics and pursued growth opportunities.

The line in the sand is clearly marked in the monthly chart at $143. There are concerns about oil slipping below the $67 level which would have implications for CVX. The lower valuation makes the risk more palatable and the Trump Administration will be viewed as more favorable for energy plays although we would note energy was the worst performing sector under the first Trump presidential run. Ironically, energy was the best performer under the Biden Administration. 

3M Co. (MMM): Yield 5.6%; YTD +41.9%; Forward P/E 16.37x

In 2024, 3M Company (MMM) demonstrated robust financial performance and strategic focus. The company reported a double-digit increase in adjusted earnings and solid free cash flow generation in the third quarter, leading to an upward revision of its full-year adjusted earnings outlook to a range of $7.20 to $7.30 per share.  This financial strength was attributed to strong operational execution across its diverse business segments.

Strategically, 3M continued to refine its portfolio. The company completed the spin-off of its healthcare division, Solventum, which subsequently explored the sale of its purification and filtration unit to streamline operations.  However, 3M faced legal challenges, including a class-action lawsuit alleging concealment of health risks associated with per- and polyfluoroalkyl substances (PFAS) used in carpets and rugs.  Despite these challenges, 3M's stock showed resilience, with a year-to-date gain of 48%, making it one of the top performers in the Dow Jones Industrial Average. 

We are sharing a quarterly chart to highlight the significance of the long-term trend at play. MMM is currently trading at two-year highs as it attempts to break out of the five-year downtrend that began in 2018. A move above this trendline could pave the way for a test of resistance in the $160-170 range, corresponding to the highs from 2021-2022. Despite its strong performance in 2024, the stock remains attractively valued. With most legal issues now resolved, MMM is well-positioned for further gains, provided it maintains operational efficiency and continues its business turnaround efforts.

Coca-Cola Co. (KO): Yield 3.1%; YTD +6.0%; Forward P/E 20.95x

In the third quarter, the company reported net revenues of $11.85 billion, a slight decline of 1% from the previous year, while organic revenues grew by 9%. Operating income decreased by 23%, attributed to restructuring costs and a significant charge related to the acquisition of Fairlife. Despite these challenges, Coca-Cola raised its full-year guidance, anticipating a 10% growth in organic revenues, reflecting confidence in its strategic initiatives. 

Strategically, Coca-Cola entered a five-year partnership with Microsoft to enhance its technological capabilities, investing $1.1 billion in Microsoft's cloud and generative AI services to drive innovation and productivity.  However, the company faced criticism for revising its environmental goals, reducing its target for recycled materials in packaging to 35-40% by 2035, down from the previous 50% by 2030. This adjustment drew backlash from environmental groups concerned about increased plastic waste.  Overall, 2024 was a year of strategic realignments for Coca-Cola, balancing financial growth with technological advancements and environmental responsibilities.

The chart for KO is a little more concerning when compared to other candidates. As we can see on the daily chart above, this has been in a descending triangle and has fallen below the 200-day MA (red line). KO attempted to rally back above that ahead of the Thanksgiving Holiday but was firmly rejected. The YTD lows around $58 are coming into focus. We would prefer to see the stock hold this level before getting involved. 

Merck & Co. Inc. (MRK): Yield 3.1%; YTD -6.8%; Forward P/E 10.80x

In 2024, Merck & Co. reported a 4% year-over-year increase in third-quarter revenue, reaching $16.7 billion. This growth was propelled by the oncology segment, with Keytruda sales rising 17%, and the successful launch of Winrevir, a treatment for pulmonary arterial hypertension. However, Merck faced challenges, notably an 11% decline in sales of its diabetes medications, Januvia and Janumet, and a 42% drop in Gardasil sales, primarily due to reduced demand in China. These factors led Merck to adjust its full-year revenue and earnings forecasts downward. 

Strategically, Merck made significant strides in its pipeline and partnerships. The company announced positive Phase 3 trial results for a subcutaneous formulation of Keytruda, enhancing patient convenience and potentially extending the drug's market exclusivity. Additionally, Merck acquired EyeBio, a UK-based biotech firm, for up to $3 billion, aiming to strengthen its ophthalmology portfolio with promising treatments for conditions like age-related macular degeneration. Despite a broader slowdown in pharmaceutical mergers and acquisitions, Merck's targeted investments reflect its commitment to innovation and addressing unmet medical needs. 

Shares of MRK have underperformed the market. The stock broke a long term trend line and has slipped in to test the 200-weekly moving average. This is the key level for investors to watch. The valuation and yield make this attractive but the company does need to show signs of recovery in some of its key diabetes drugs and Gardasil. 

Cisco Systems, Inc. (CSCO): Yield 3.0%; YTD +17.9%; Forward P/E 15.19x

In 2024, Cisco Systems, Inc. (CSCO) showcased resilience and strategic growth amid a dynamic technological landscape. The company reported fiscal year revenue of $53.8 billion, a 6% decrease from the previous year, with a fourth-quarter revenue of $13.6 billion. Despite these declines, Cisco achieved its highest gross margins in two decades, with a GAAP gross margin of 64.7% and a non-GAAP gross margin of 67.5%. This financial stability was bolstered by a 14% year-over-year increase in product orders, indicating robust demand for its offerings. 

Strategically, Cisco made significant advancements in artificial intelligence (AI) and cybersecurity. At Cisco Live 2024, the company unveiled AI-powered innovations across its portfolio, including investments in Cohere, Mistral AI, and Scale AI, to enhance customer readiness and infrastructure.  The $28 billion acquisition of cybersecurity firm Splunk further strengthened Cisco's software and security capabilities, positioning it as a leader in AI-driven security solutions.  These initiatives underscore Cisco's commitment to innovation and its strategic focus on emerging technologies to meet evolving customer needs.

Shares of CSCO hit a three year high in November, breaking above the 2023 high of $58.98. This is another name picking up some steam around the AI infrastructure build out. The two decade high of $64.28 looms and should be tested as we head into the close of 2024. If it is able to push above this level then the all-time high of $82, set back in 2000, will come into focus. 

Please note that these selections are based on dividend yields as of early December 2024. The official Dogs of the Dow list for 2025 will be determined based on dividend yields at the close of the market on December 31, 2024. Investors should consider the most current data and conduct thorough research before making investment decisions.