Global macroeconomic challenges, interest rate hikes and inflationary pressure dented the performance of the indices in 2023. However, the broader equity markets have started improving, with the Dow Jones Industrial Average Index (DJIA) recently crossing the 37,000 mark on Dec 13.

DJIA rallied amid speculations that the Federal Reserve is planning to cut interest rates several times next year. The Fed also kept interest rates unchanged at a range of 5.25% to 5.5%, indicating that the inflationary pressure was easing now. The Dow is up 13.3% year to date. In comparison, the index was down 8.8% in 2022.

With Dow expected to continue its upward trajectory on rate cut speculations, investing in blue chip companies appears to be a prudent decision. These blue-chip stocks generally have a large market cap, solid cash flows, a healthy balance sheet and, in most cases, a stable dividend policy that aims to reward shareholders with risk-adjusted returns.

Investors can utilize the classic long-term stock picking strategy called ‘The Dogs of the Dow,’ which aims to deliver solid returns while maintaining low risk.

What is ‘The Dogs of the Dow’ Strategy?

The strategy involves the purchase of equal dollar amounts of the ten Dow Jones Industrial stocks with the highest dividend yields (calculated by dividing a company’s dividend by its current stock price). 

A very simple concept powers this strategy. The high-yielding stocks that make up the portfolio are the ones with prices that are lower relative to the dividend paid. This implies that these stocks have underperformed recently. These companies do not stay undervalued for too long as share prices of companies at the bottom of their business cycle appreciate relatively faster than companies at other stages of their business cycles.

In 1991, Michael O’Higgins, in his book, Beating the Dow, first introduced the investing strategy known as ‘Dogs of the Dow’ based on the DJIA.

However, the performance of this particular strategy remains uneven. Investors can consider this particular strategy as it is a dividend-based strategy. Generally, stocks with stable dividend policy are regarded as sound additions to one’s investment portfolio. Dividend-paying stocks carry low risk and are favored as these reduce the overall portfolio risk.

The yield on 10-year Treasuries, which is widely viewed as one of the safest havens, was closed at 3.89% as of Dec 19. With Fed planning rate cuts in the upcoming year, yields are expected to fall further. This makes investing in dividend stocks prudent. 

3 Best 'Dogs of the Dow' Stocks

We bring three stocks from the ‘Dogs of the Dow’ list that have a dividend yield of more than 3%. These blue-chip stocks have a market capital in excess of $50 billion, have a solid Zacks Industry Rank, and are placed within the top 50% of more than 250 Zacks industries. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.

Added to the intrinsic value proposition of these stocks, a healthy dividend yield satisfies the appetite of risk-averse investors. The fact that these stocks have the potential to outperform the market while also historically providing a decent dividend yield has made them prized assets.

Let’s discuss three such stocks:

3M Company (MMM Quick QuoteMMM - Free Report) : Headquartered in St. Paul, MN, 3M Company, together with its subsidiaries, operates as a diversified technology firm. It has manufacturing operations across the globe and serves a diversified customer base.

Strength in auto OEM (Original Equipment Manufacturer) and medical solutions businesses augurs well for 3M’s growth. Solid momentum in the roofing granules business bodes well for the Safety and Industrial unit. Improvement in supply chains and easier availability of labor and raw materials should drive MMM’s performance.

MMM carries a Zacks Rank #2 (Buy). It also has a Zacks Industry Rank #82 (top 33%). You can see the complete list of today’s Zacks #1 (Strong Buy) Rank stocks here.

Apart from a favorable rank, MMM has a VGM Score of B. Per Zacks's proprietary methodology, stocks with a combination of a Zacks Rank #1 or 2 and a VGM Score of A or B offer solid investment opportunities.

The Zacks Consensus Estimate for 2023 and 2024 earnings have improved by 2.1% and 2.5%, respectively, in the past 60 days, reflecting analysts’ optimism.

MMM’s long-term earnings growth rate is pegged at 7.3%. The company’s dividend yield stands at 5.67%.

International Business Machines Corporation (IBM Quick QuoteIBM - Free Report) : The company has gradually evolved as a provider of cloud and data platforms. Red Hat's acquisition, in particular, has helped it strengthen its competitive position in the hybrid cloud market.

IBM is poised to benefit from strong demand for hybrid cloud and AI, driving growth in the Software and Consulting segments. The company's focus on developing next-generation AI-powered technology will likely drive the top line. IBM's enterprise-focused AI and data platform Watsonx is gaining solid traction. Its unified platform allows AI developers to train, fine-tune and deploy AI solutions per customer-specific requirements. However, intense competition in various end markets is exerting pressure on profits. Low demand for Distributed Infrastructure and support services is impeding the top line.

The stock carries a Zacks Rank #3 (Hold). It has a Zacks Industry Rank #92 (top 37%).

The Zacks Consensus Estimate for 2023 earnings has improved by 5 cents to $9.45. IBM’s long-term earnings growth rate is pegged at 3.9%.

The company’s dividend yield stands at 4.08%. IBM has a P/E ratio of 17.22 versus the industry average of 18.90.

The Coca-Cola Company (KO Quick QuoteKO - Free Report) : The company is witnessing steady momentum in its business. The top line is being driven by growth across operating segments, aided by improved price/mix and concentrate sales. The ongoing recovery in the markets and market share gain in the non-alcoholic ready-to-drink beverages space bodes well.

As a result, management has raised its view for 2023. Coca-Cola anticipates organic revenue growth of 10-11% for 2023, compared with 8-9% growth expected earlier. Comparable currency-neutral earnings per share are estimated to increase 13-14% versus 9-11% growth mentioned earlier. The company anticipates year-over-year comparable earnings per share growth of 7-8% for 2023 compared with 5-6% growth stated earlier.

The stock currently has a Zacks Rank #3. It has a Zacks Industry Rank #23 (top 9%).

The Zacks Consensus Estimate for KO’s 2023 earnings suggests growth of 8%. The consensus mark for earnings has improved by 5 cents in the past 60 days to $2.68. KO’s long-term earnings growth rate is pegged at 6.2%.

The company’s dividend yield stands at 3.12%. KO has a P/E ratio of 22.01 versus the industry average of 54.50.