While high risk/reward investors focus on growth stocks, more conservative investors concentrate on less volatile stocks that pay dividends. Simply put, dividends are distribution payments a company makes to share profits with its stockholders. 

When looking for dividend stocks, investors can choose from an array of dividend strategies, but one that isn’t as well known to many investors is called the Dogs of the Dow. This strategy is based on selecting the highest dividend-paying stocks in the Dow Jones Industrial Average. The concept is to invest in the ten highest dividend-yielding, blue-chip stocks in the Dow at the beginning of each year.

This strategy has returned an average of 9.5% since 2000, outperforming the S&P 500’s 7.5% average return. So I thought I would take this strategy further and filter out those ten based on our POWR Ratings system. This resulted in three stocks with Buy ratings. So not only do these three companies offer dividends but are also more likely to offer price gains in the months ahead. That’s why I am highlighting Verizon Communications Inc. (VZ), Pfizer, Inc. (PFE), and International Business Machines Corporation (IBM) below.

Verizon Communications Inc. (VZ) 

VZ is one of the largest telecom companies in the U.S. It provides wireless and wireline services to retail, enterprise, and wholesale customers. The company serves about 89 million postpaid and 4 million prepaid phone customers and connects another 24 million data devices, like tablets, via its nationwide network, making it the largest U.S. wireless carrier.

With the largest customer base in the U.S., VZ is also more efficient than its competitors and therefore delivers higher profitability than its rivals. The company is pushing its core wireless business by expanding its fiber-optic network and deploying 5G wireless technology. VZ should expand its market share in the upcoming years due to its reputation and unparalleled experience.

VZ currently has a dividend yield of 4.4%, which is much higher than its industry average. The company has an overall grade of B, which translates into a Buy rating in our POWR Ratings system. The company has a Stability Grade of B, which means its growth figures and price-performance are stable. VZ also has a Quality Grade of B due to the strength in its balance sheet.

The company has a current ratio of 1.4, which indicates it has more than enough liquidity to handle short-term obligations. We also rate VZ based on Growth, Value, Momentum, and Sentiment. You can find those grades here. VZ is ranked #1 in the Telecom – Domestic industry. You can find other top stocks in this industry by clicking here.  

Pfizer, Inc. (PFE) 

PFE is one of the world’s largest pharmaceutical firms, with annual sales of close to $50 billion. The company is also an industry leader in terms of money spent on research and development, with close to $8 billion spent annually. While PFE has historically sold various types of healthcare products and chemicals, prescription drugs and vaccines now account for most sales.

The company markets a wide range of drugs and vaccines and boasts a sustainable pipeline of multiple late-stage programs that should drive future growth. The company’s massive size offers a significant competitive advantage in the development of new drugs. PFE is launching several potential blockbusters drugs in the areas of cancer, heart disease, and immunology.

Its broad portfolio of patent-protected drugs and expected COVID-19 vaccine sales should lead to a strong showing this year. PFE has a dividend yield of 4.2%, which has grown an average of 5.4% over the past five years. The company has an overall grade of B, which is a Buy rating in our POWR ratings service. PFE has a Value Grade of B, which isn’t surprising with a forward P/E of 11.47.

PFE also has a healthy balance sheet, which has led to a Quality Grade of B. As of the end of last year, the company had $12.2 billion in cash, compared with $2.7 billion in short-term debt. To access the rest of PFE’s grades (Growth, Momentum, Stability, and Sentiment), click here. PFE is ranked #25 in the Medical – Pharmaceuticals industry. For other top stocks in this industry, click here.  

International Business Machines Corporation (IBM)

IBM is a leading provider of enterprise solutions, offering a broad portfolio of IT hardware, business and IT services, and a full suite of software solutions. The company is a dominant provider of mainframes and is a prominent player in the public clouds space. It also offers data management systems and other software products, like middleware and integration software.

The company has a strong patent portfolio, which makes its customers loyal. IBM is also seeing strong demand for its cloud-based solutions, blockchain, security, and digital transformation offerings. The company should benefit from growth in its cloud & cognitive software as its customers more towards hybrid infrastructures. Going forward, IBM’s growth is expected to be driven by analytics, cloud computing, and security.

IBM has the largest dividend yield of the three at 4.9%. The company has an overall grade of B, which translates into a Buy rating in our POWR Ratings system. IBM has a Value Grade of B with a trailing P/E of 21.4 and a forward P/E of 11.89. The company also has a Momentum Grade of B as its stock has shown positive momentum since early March.

For the rest of IBM’s grades (Growth, Stability, Sentiment, and Quality), click here. IBM is ranked #10 in the B-rated Technology – Hardware industry. For more top stocks in that industry, click here.

VZ shares were unchanged in after-hours trading Thursday. Year-to-date, VZ has gained 0.33%, versus a 11.60% rise in the benchmark S&P 500 index during the same period.

About the Author: David Cohne

David Cohne has 20 years of experience as an investment analyst and writer. Prior to StockNews, David spent eleven years as a consultant providing outsourced investment research and content to financial services companies, hedge funds, and online publications. David enjoys researching and writing about stocks and the markets. He takes a fundamental quantitative approach in evaluating stocks for readers. More...

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