Selling Covered Calls On The Dogs Of The Dow Stocks

The Dow Jones Industrial Average Index ($DOWI) is made up of 30 large, established companies from a variety of industries. It is frequently used as an indicator of the overall health of the U.S. stock market and economy. Here we have two Dow stocks that are stable, dividend-paying companies. As we head into the new year, savvy investors should consider adding these names to their portfolios.

Dow Stock #1: Cisco Systems

With a market cap of $234.9 billion, Cisco Systems is a global leader in networking hardware, software, and services. While its roots are in internet connectivity, its portfolio now includes cloud computing, cybersecurity, artificial intelligence, and collaboration tools.

Cisco stock is up 18% year-to-date, compared to the Dow Jones Industrial Average's nearly 15% gain.

Cisco's focus on subscription-based services and software has resulted in a more consistent revenue stream, mitigating the cyclical nature of hardware sales. While subscription-based revenue streams are beneficial in the long run, they may cause short-term revenue fluctuations if hardware sales fall, as happened in the first quarter of fiscal 2025. Product revenue fell by 9%, resulting in a 6% decline in total revenue to $13.8 billion. Adjusted earnings per share fell to $0.91 from $1.11 in the same quarter last year.

However, the remaining performance obligation (RPO), or contracted revenue to be recognized over the next 12 months, stood at $40 billion, up 15%. Furthermore, the company's deferred revenue totaled $27.5 billion in advance for products and services that have yet to be delivered.

Despite ongoing investments in portfolio expansion and AI upgrades, as well as strategic acquisitions, the company maintains a strong balance sheet with significant cash reserves and manageable debt levels. In Q1, it acquired DeepFactor, a privately held cloud-native application security company, and Robust Intelligence, a private AI security solutions provider. At the end of the quarter, cash, cash equivalents, and investments totaled $18.7 billion, with a manageable debt-to-equity ratio of 0.43x.

Cisco has a dividend yield of 2.7%, which is higher than the tech sector average of 1.4%. The forward payout ratio of 43.8% indicates that dividend payments are sustainable, with room for growth. Cisco has also increased its dividends consistently over the last 13 years.

Cisco’s commitment to returning capital to shareholders is evident in its consistent dividend payments and stock repurchase programs. In the first quarter, Cisco returned $3.6 billion to shareholders through dividends and buybacks.

Management expects revenue growth of 2% to 4% in fiscal year 2025, which is consistent with the consensus estimate of $56 billion. Adjusted earnings could fall by 2% before rising 7.5% in fiscal 2026. Cisco stock is trading at 15 times forward 2026 earnings, compared to a five-year average historical price-to-earnings multiple of 38.9x.

Overall, Cisco stock is ideal for long-term investors seeking a combination of stability, income, and moderate growth. The company's strong financial position, emphasis on high-margin software and services, and strategic investments in emerging markets such as cybersecurity and 5G make it an appealing choice.

On Wall Street, Cisco stock is a "Moderate Buy.” Of the 21 analysts covering Cisco, seven have rated it a “Strong Buy,” two have a “Moderate Buy” recommendation, and 12 suggest a “Hold.” Its mean price target of $62.63 implies the stock could go as high as 6.18% from current levels. Its Street-high estimate of $78 suggests the stock could rally as much as 32.2% over the next 12 months.

Dow Stock #2: Chevron Corporation

With roots dating back to 1879, Chevron Corporation is one of the world's oldest and largest oil and gas companies. The company is well-known for its involvement in all aspects of the energy sector, including oil and natural gas exploration, refining, and marketing.

Its business model, based on a mix of upstream and downstream operations, has helped the company weather volatile commodity price cycles and remain stable. Chevron stock has fallen 4% year-to-date, compared to the Dow's gain and the overall market gain of 26%.

In the third quarter, both upstream and downstream segments underperformed, leading to an adjusted earnings dip of 17.7% to $2.51 per share in the quarter. According to management, lower margins on refined product sales and some other tax-related headwinds caused the decrease in earnings.

However, global net oil-equivalent production increased by 7% over Q3 2023, driven by higher production in the Permian Basin (thanks to AI) and the acquisition of PDC Energy completed in 2023.

Chevron's strong balance sheet and disciplined capital allocation strategy have allowed it to maintain dividend payouts while investing in growth initiatives. Chevron has consistently increased its dividends for the past 37 years, making it a Dividend Aristocrat.

The forward payout ratio of 58.8% indicates that the company's earnings can support dividend payments, with room for dividend growth. It reported $4.7 billion in cash and cash equivalents at the end of the quarter. It also generated $5.6 billion in free cash flow during the quarter and returned $7.7 billion through dividends and share repurchases. Its low debt-to-equity ratio of 0.16x reflects its cautious approach to leverage. Chevron has an attractive dividend yield of 4.5%, compared to the energy sector's average yield of 4.2%.

Chevron's upstream operations account for the majority of its earnings, so the company intends to spend $13 billion in upstream capex and $1.2 billion in downstream capex in 2025 as part of its overall capex budget.

In addition, Chevron began several projects during the quarter, including the Anchor, Jack/St. Malo, and Tahiti fields. Management expects that these projects and upcoming project startups in 2025 will increase "U.S. Gulf of Mexico production to 300,000 barrels of net oil-equivalent per day by 2026."

Furthermore, the company intends to sell $10 billion to $15 billion of its assets by 2028, as well as make structural cost cuts of $2 billion to $3 billion by the end of 2026. These strategic initiatives may help boost Chevron's earnings in the near future.

Analysts expect Chevron's earnings to fall 20% in 2024 before rising 5.6% in 2025. On Wall Street, Chevron stock is rated a "Strong Buy." Of the 22 analysts covering Chevron, 15 recommend it as a "Strong Buy," two as a "Moderate Buy," and five as a "Hold." Its mean price target of $175.14 implies that the stock could rise by 22.5% from its current level. Its Street-high estimate of $195 indicates that the stock could rally as much as 36.4%.

While challenges persist, Chevron’s diversified business model, strong financial health, and shareholder-focused policies make it a great choice for both growth- and income-oriented investors.

On the date of publication, Sushree Mohanty did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.

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