Is it possible at this point to put together an accidentally high-yielding portfolio? Can you eyeball and buy, knowing that you will have to buy more if there is another big selloff related to Covid-19 -- one we have to expect, given how easy it is to transmit and we haven't been able to tamp the 1.4% mortality rate around the world?
At the bottom on Friday, there were 10 Dow stocks that had accidentally high yields above 3.3%, which is not bad when you consider the comparable 1.1% 10-year treasury. So, is it worth the risk? Take a look at this analysis considering what could happen, and you decide.
The highest yielder in the Dow is Dow Chemical (DOW) at 7%. I wish so much I could say I trust this dividend, but it's been cut before in a recession and this new iteration, sloughed from the disastrous Dow-Dupont (DDP) combination, seems every bit as precarious in a downturn. I think CEO Jim Fitterling is doing a terrific job managing the cyclical hand he's been dealt, as well as its oil linkage, but the combination of economic sensitivity to the new stay-at-home economy and its sustainability concerns -- think the Great Pacific Garbage Patch -- make this first Dow stock not worth the risk.
Among the highest yielders, as you can imagine, are oil and gas stocks: Exxon Mobil (XOM) at 6.77% and Chevron (CVX) at 5.5%. This pairing is extraordinary in itself as Exxon's yield has almost always been well below other oil companies because of its superior production and balance sheet prudence. That's no longer the case.
It's a sign that this industry's travails can crush any company, even a good one like Exxon. That's why I don't trust these yields to protect you AT ALL. BP (BP) , which has been able to fund dividend increases and growth, yields 8%. So, I think there's more downside here, especially if global growth continues to slide. Don't forget, I am a wholehearted believer that there are so many more managers than there used to be who consider the level of carbon emissions of companies and simply won't touch these two on principle.
IBM's (IBM) got a 5% yield -- which is tempting, but we have a wait-and-see situation with its cloud-based emphasis. I am a huge believer in the secular growth of the cloud but if you don't have growth away from the cloud -- and here you have actual decline -- you just can't manage the transition with the level of comfort I need to get that 5% reward.
Pfizer (PFE) at 4.55% intrigues. It's got a solid balance sheet and a decent pipeline. It sells at 12x earnings and I believe in the estimates. The yield is safe, but the growth is subpar. Still, it would be a key part of any higher-yield portfolio.
So, for that matter, would Verizon (VZ) at 4.5%. I like the cash flow here and I am not concerned that the 5G buildout will cost too much. Longer-term, the consolidation into three players is huge for Verizon and I would buy it here and buy more lower.
Seventh is back to being tricky: Walgreen's (WBA) at 4%. I am worried that this company could truly be eviscerated by Amazon (AMZN) with the back of the store, the scrip business, not being able to save it because of obvious political risk in an election year, even if Biden is the standard bearer. I think that this company's yield is suspect and won't protect you AT ALL.
Same goes for 3M (MMM) . Here's a company that now has an open-ended environmental crisis with PFAS, something that I discussed with Alan McKim, CEO of Clean Harbors (CLH) , on Friday's Mad Money. I think 3M has systematically underestimated the amount of money it will have to pay in judgments, settlements and legal fees and the 3.9% won't be viewed as sustainable. The mask earnings will not protect you, and the cyclical businesses aren't troughing yet.
Cisco's (CSCO) yield, 3.6%, is certainly defensible. The company has the cash flow. The Action Alerts Plus trust owns it. Candidly, though, it will have no revenue growth to speak of versus other tech companies, so it will remain an unloved orphan perceived as tired and too hardware centric in a software world.
Finally, there's Caterpillar (CAT) at 3.3%, which, frankly, I consider to be way short of the coverage I need for this name, which is heavily cyclical and heavily dependent upon both oil and China. I wouldn't trust it until you got to about 4.5%, which is quite a ways from here.
Altogether, you are truly talking about a higher-yielding portfolio that I don't find nearly defensive enough to own. My conclusion: Way too much risk, not enough reward. They can all go lower still in a true Covid-related bear market.