Don't Be So Quick to Dismiss the Dow

You can find value in Dow large-caps, but you may have to run with the dogs.

That old-time "Dogs of the Dow" theory -- buy the 10 highest-yielding stocks in the Dow and hold them for a year -- was distinctly passe during the go-go, highflying tech era. But in difficult markets, dividends can be like ice-cold lemonade on a sweltering summer's day. And while value may be tough to find, Dow names with stable yields can provide it.

The Doggish theory provides mixed results. Since 1973 the Dogs provide an average annual return of just more than 17%, compared with about 12% for the 30-stock average. Yet, over the past five years, the Dogs' performance has lagged the Dow by an annual average of about five percentage points (14% vs. 19%).

The message is intuitive: Dividends can push you over the top in difficult and average markets, but will underperform during market growth spurts. Given today's environment, here are five Dow dogs worth a look.

Every Dog Has Its Day Five Dow Dogs That Safely Yield
Company	Recent Price	Stated Dividend	Current Yield	2001 EEPS	Payout Ratio
Philip Morris (MO:NYSE)	$ 44.77	$ 2.12	4.74%	$ 4.05	52.35%
Eastman Kodak (EK:NYSE)	43.38	1.76	4.06	3.70	47.57
J.P. Morgan Chase (JPM:NYSE)	42.77	1.36	3.18	2.47	55.06
SBC Communications (SBC:NYSE)	43.82	1.03	2.35	2.36	43.64
Exxon Mobil (XOM:NYSE)	41.38	0.92	2.22	2.72	33.82
Sources: Thomson Financial/First Call, Credit Suisse First Boston, Company Reports

All five provide top-tier yields, payout ratios that support current dividends and, while not necessarily cheap, have reasonable valuations. Plus -- while not flattering -- all carry baggage that raise investor concerns.

The tobacco travails of Philip Morris(MO Quote) are well-known, especially the recent multibillion-dollar verdict in California. However, solid fundamentals, strong cash flow, a compelling valuation and a deep legal bench keep the company on the list. Ironically, absent the recent California verdict, many experts feel the litigation environment is improving. And remember, Philip Morris is more than just tobacco.

Eastman Kodak(EK Quote), talk about dogs! Many investors think the Kodak moment is long gone, but the stock is attractively priced at less than 10 times 2002 estimates. And a safe yield of more than 4% provides stability. While the company has shown it can fail in execution, positive news is magnified with expectations so low. The key to growth is Kodak's digital and imaging businesses. Look for positive earnings growth late this year or early next.

J.P. Morgan Chase(JPM Quote) can't seem to shake the merger-integration bug. Combined with Wall Street's weakness, the stock has been punished. However, a market pickup and Fed rate cuts should benefit the company just as the merger synergies begin to kick in. If that happens, the current $3.49 estimate for 2002 earnings could be conservative. This isn't an overnight story, but the 3%-plus dividend pays for patience.

There isn't a better telecom executive than Ed Whitacre at SBC Communications(SBC Quote), and he is positioning SBC to be a major player across the telecom services spectrum. The company has stumbled -- which one hasn't? -- in its broadband rollout and regulatory hurdles have slowed the long-distance growth, causing earnings growth to slow. However, a return to midteens growth next year could be a catalyst.

In the oil patch, Exxon Mobil(XOM Quote) is as blue-chip as they come. And while energy prices can have an impact on earnings, the stock's price decline since mid-May makes it more attractive, especially if the current upward trend in oil prices continues. And with analysts expecting earnings to slip next year, Exxon has a contrarian feel to it. Combine that with a 2%-plus dividend, and I like the potential with minimal risk.

There you have it. While the Dow might not entice you with overwhelming value, a focus on dividends and relative value does seem to provide some opportunities for patient, more conservative investors.