3 Dogs of the Dow Picks for the New Year

Last year was a great one for stocks, with the Nasdaq having one of its best calendar year gains in the recent past and the S&P 500 performing well, too. However, with 2023 behind us, it is time to look forward and potentially add to existing holdings.

One place to look is the 2024 Dogs of the Dow list. It comprises the 10 stocks with the highest yields at the end of the calendar year 2023. They are usually companies that have operational challenges. Alternatively, the sector or industry may have been out of favor with investors.

That said, three of the 10 stocks stand out because of their yield, dividend safety and long-term dividend growth.

Coca-Cola (KO)

Coca-Cola (NYSE:KO) is arguably the quintessential income stock. The firm has a long history of generating investor gains and dividend payments. It was founded in 1886 and has grown into the largest packaged drink company in the world. Coca-Cola sells almost every non-alcoholic drink, like carbonated soft drinks, water, sports drinks, dairy, juices, teas, coffees and energy drinks. The firm has generated more than $45 billion from its many brands.

Coca-Cola’s brands include well-known ones like Coke, Diet Coke, Sprite, Minute Maid, Fanta, Fresca, PowerAde, Schweppes, Dasani, Gold Peak, Honest Tea, Topo Chico, FUZE Tea, Costa and Schweppes. Many are leaders globally, with 26 brands reaching at least $1 billion in revenue.

The firm grows by selling more drinks through its large network of distributors. It does so through extensive advertising and marketing to increase volumes. Also, product extensions add to sales. Lastly, Coca-Cola periodically raises prices. Besides organic growth, the beverage giant conducts tuck-in acquisitions, expanding its brand portfolio. The last major acquisition was Body Armor, an energy drink; before that was Costa Coffee.

The forward dividend yield is just shy of 3.1%, almost precisely the five-year average. Coca-Cola has paid a dividend since 1920, making it one of 24 American companies on the list of longest dividend-paying equities. In addition, the firm has a 62-year dividend growth streak and is on the list of Dividend Kings.

Coca-Cola usually increases the dividend between 3% and 5% annually because the payout ratio is elevated at about 69%. However, dividend safety is high because of stable revenue, earnings and free cash flow. Portfolio Insight gives the company a B+ dividend quality grade, adding confidence about the annual payout.

The equity typically trades at an elevated valuation, but the forward earnings multiple is 21.4x, below the five-year range. We view Coca-Cola as a long-term buy.

Chevron (CVX)

Chevron (NYSE:CVX) is one of two integrated American global oil giants. The firm operates in two business segments: upstream and downstream. The upstream segment explores, develops, produces and transports crude oil and natural gas. The downstream segment refines crude oil into petroleum and petrochemical products.

Total revenue was $202,702 million in the last 12 months, somewhat lower than in 2022 because of lower oil prices.

The oil giant grows primarily by exploring and developing new crude oil and natural gas projects. This is inherently a capital-intensive endeavor, giving a company of Chevron’s size an advantage. Once a field and the potential oil or natural gas amount are verified, the quantity is added to reserves. Next, development may take years before production starts and is scaled.

In addition, Chevron grows by acquiring smaller companies. It is currently pursuing Hess Corporation (NYSE:HES) in a $53 billion takeover. Before Hess, the company acquired ChacroServicios, Renewable Energy Group, Noble Energy and Puma Energy Australia in the past few years.

Because of lower oil prices, Chevron’s revenue was lower in 2023 than in 2022. Consequently, the share price declined from its peak in early 2023. Simultaneously, the dividend yield has risen to approximately 4.2%, more than double that of the average for the S&P 500 index. Chevron typically increases the dividend rate from 4% to 6% annually.

The excellent dividend safety will probably cause more increases to come. The firm is a Dividend Aristocrat with a 36-year streak. The payout ratio is moderate at about 43%, and free cash flow more than covers the ordinary dividend. Chevron earns a B dividend quality grade. It also has an AA-/Aa2 high-grade investment credit rating, giving greater confidence about safety.

Besides the excellent yield, dividend growth, and long history of paying a dividend, the equity is undervalued. The forward price-to-earnings (P/E) ratio is about 11x, on the lower end of the 10-year range.

Cisco Systems (CSCO)

Cisco Systems (NASDAQ:CSCO) is the market leader for internet protocol networking. The company designs, manufactures and sells enterprise hardware and software for networking, switching, routing, data centers and wireless applications. Also, Cisco offers software for networking, analytics, collaboration, security, and firewalls. The firm is ranked 15th in the 2023 Interbrand’s Best Global Brand list. Networking dominance allowed retail revenue to reach nearly $57 billion in fiscal year 2023.

The company grows organically by selling more hardware, software and services to its many customers globally. Cisco innovates to add features and security to its products. It also offers subscriptions, allowing Cisco to receive more consistent revenue streams.

Because networking is a mature market, Cisco purchases several small companies yearly to bolster its offering and maintain technological leadership. However, Cisco occasionally buys larger companies. It announced a deal to buy Splunk (NASDAQ:SPLK) for $28 billion, adding to its security offerings.

Cisco has paid a dividend for 13 years, making it a Dividend Contender. Because of flattish share price performance in 2023, the yield has risen to about 3.1%. The firm has increased the dividend by about 4% per year on average in the trailing five years. The modest payout ratio of about 40% suggests more increases in the near future. Cisco’s dividend has high safety because of free cash flow and the net cash position on the balance sheet.

Cisco is undervalued now. The forward P/E ratio is 13x, below the five-year and 10-year ranges. Investors are getting a market leader at a reasonable price.

On the date of publication, Prakash Kolli held a LONG position in KO and CSCO. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.