The Dow Jones Industrial Average (DJINDICES:^DJI) accelerated 19% overall in 2021, closing out the year near its all-time high. The strong performance by this group of 30 stocks raises an important question: Are there any Dow stocks left to buy that are trading at attractive valuations?
Because it’s a market of stocks and not a stock market, I believe that there are still good individual Dow stocks worth snatching up. In fact, here are three Dow components that appear to be solid buys for income investors.
1. Verizon Communications
Telecom giant Verizon Communications (NYSE:VZ) is a Dow stock worth looking at in January. While Verizon shares falling 12% overall in 2021 was a stark contrast to how the Dow index performed, that’s exactly why it’s an enticing buying opportunity. Verizon was the fifth-worst-performing Dow stock last year, which makes it a Dog of the Dow. This underperformance has pushed Verizon’s dividend yield up to 4.8% and its forward P/E ratio down to just 9.7.
Verizon’s weak showing last year was an excessive punishment from the market. To be sure, the competition within the telecom industry to attract and maintain mobile data customers will likely remain fierce as the fifth-generation (5G) of cellular communications continues to roll out across the U.S. But there should be plenty of demand to go around for companies like Verizon to continue generating the earnings necessary to support its growing dividend. That’s because the number of smartphone users in the U.S. is expected to climb from 298 million last year to 312 million by 2025.
This continued transition to smartphones and Verizon’s reputation as a leader in its industry explain why analysts are predicting 4% annual earnings per share (EPS) growth over the next five years.
Verizon’s dividend payout ratio is set to be around 48% in 2022, which is why shareholders can expect 3% to 4% annual payout raises going forward. Coupled with a yield near 5%, the stock is a great potential buy for income investors.
Pharma stock Merck (NYSE:MRK) underperformed in 2021 as well. Despite an analyst forecast that Merck’s non-GAAP (adjusted) EPS would surge 27% higher to $5.77 in 2021, the stock fell 6% last year. This made Merck the eighth-worst-performing Dow stock in 2021.
There are concerns that the drug pricing control legislation currently being proposed in the Build Back Better Bill would weigh on the profitability of big pharma, which has played into Merck’s poor performance. But it’s unlikely that the bill will be able to clear the divided Senate and make its way to the president’s desk to be signed into law.
The market also could be fearful that Merck doesn’t have the pipeline necessary to move past Keytruda’s key patent expirations in 2028. However, Merck’s 71 programs in phase 2 clinical trials and 25 programs in phase 3 clinical trials should help the company quickly bounce back from Keytruda’s looming patent expirations. In the meantime, analysts are forecasting that Merck will generate 15% annual earnings growth in the next five years. With a payout ratio that will be approximately 46% in 2021, this should allow for dividend growth going forward.
These arguably exaggerated concerns have inflated Merck’s dividend yield to a market-beating 3.6% and lowered its forward P/E ratio to 10.7, which makes it a compelling growth stock at a reasonable price.
The final stock to consider buying hand over fist this month is McDonald’s (NYSE:MCD). Unlike Verizon and Merck, McDonald’s stock performed well in 2021, appreciating 25%.
The biggest reason for McDonald’s robust stock performance last year was that the company rebounded from the COVID-19 pandemic amid increasing vaccination rates and easing restrictions. This led to McDonald’s revenue soaring 23.9% to $17.21 billion through the first nine months of last year. McDonald’s adjusted EPS also skyrocketed 75.8% higher year over year to $7.86 through the first three quarters of last year.
A reversion in consumption habits and the company’s successful launch of its MyMcDonald’s Rewards program in the U.S. last July are why analysts think the stock will grow its adjusted EPS at a 22% clip annually through the next five years. McDonald’s dividend payout ratio is positioned to be around 56% for 2021, which gives the stock room to keep growing its payout.
Stacking McDonald’s growth potential up against its forward P/E ratio of 26.5, I believe it is still a fairly priced stock with a 2.1% dividend yield income investors should appreciate.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.