We recently compiled a list of the 10 Dogs of the Dow Dividend Stocks to Invest in. In this article, we are going to take a look at where Merck & Co., Inc. (NYSE:MRK) stands against the other dividend stocks.

Dividend-focused investors are often drawn to stocks with high yields, shaping their strategies around acquiring such investments. A notable approach is the Dogs of the Dow (DOD) strategy, which involves selecting the 10 highest dividend-yielding stocks from the Dow Jones Industrial Average (DJIA) each year. This method operates on the belief that these so-called “Dogs” are either undervalued or out of favor. By targeting these stocks, investors hope to benefit from potential price appreciation while also securing a steady stream of dividend income. The strategy is based on the idea that these high-yield stocks are merely temporarily undervalued and are likely to recover shortly.

Numerous financial experts have provided detailed explanations of the strategy to help investors develop a thorough understanding of it. Robert R. Johnson, professor of finance at the Heider College of Business at Creighton University, spoke about the Dogs in one of his interviews with Business Insider. Here are some comments from the analyst:

“The underlying premise behind the strategy is mean reversion. The [Dogs of the Dow] is based on the theory that stocks can be over or undervalued, but over the long run those that are undervalued will ‘revert to the mean.”

Dow stocks are typically not inexpensive without reason. These companies rarely face the risk of going out of business, and their high yields often result from falling out of favor. According to a report by Forbes, historically, the Dogs have delivered strong long-term performance, but their recent results have been mixed. While they lagged behind the broader market in 2019, 2020, and 2021, they surged ahead in 2022, only to underperform again in 2023.

Also read: 10 Best Mid-Cap Dividend Aristocrats To Buy

However, over the long term, the strategy has managed to outperform its benchmark. Michael O’Higgins found that over a 26-year period, a theoretical portfolio made up of high dividend-yield stocks from the Dow Jones delivered an annualized return of 17.9%. This performance exceeded the Dow Jones Industrial Average’s annualized return of 13% during the same timeframe.

A study in the International Journal of Trade, Economics, and Finance analyzed various versions of the DOD strategy and found that they consistently outperformed the DJIA on a risk-adjusted basis. The research explored three DOD variations: Dow-10, Dow-5, and the “Small Dogs of the Dow,” while incorporating recent market events like the 2001 dot-com bubble, the 2008 financial crisis, and the subsequent recovery. The study revealed that all three strategies delivered better investment performance than the DJIA between 1996 and 2006. Notably, the traditional Dow-10 portfolio achieved a total return of 406.6% during this time, surpassing the DJIA’s return of 355.6%.

Despite the strong performance of the Dogs, analysts caution investors to approach this strategy with care. Kevin Simpson, founder and chief investment officer at Capital Wealth Planning, made the following comment in one of his interviews with CNBC:

“The idea here is that just because they’re ‘Dogs of the Dow’ — some of them really are dogs — and you have to be careful and selective as a stock picker.”

Our Methodology:

We began with a pool of 30 stocks from the Dow Jones Industrial Average (DJIA) and identified dividend-paying stocks from this selection. As a majority of the stocks in the index offer dividends, we specifically picked the 10 stocks with the highest dividend yields as of December 17. The stocks are ranked in ascending order of their dividend yields. We also considered hedge fund sentiment around each stock using Insider Monkey’s data for Q3 2024.

Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points. (see more details here).

Merck & Co., Inc. (NYSE:MRK)

Dividend Yield as of December 17: 3.23%

Merck & Co., Inc. (NYSE:MRK) is an American pharmaceutical company, based in New Jersey. It mainly provides innovative health solutions to its consumers. The company currently offers a quarterly dividend of $0.81 per share, having raised it by 5.2% on November 19. This marked the company’s 14th consecutive year of dividend growth, which makes MRK one of the best Dogs of the Dow dividend stocks. The stock’s dividend yield on December 17 came in at 3.24%.

Merck & Co., Inc. (NYSE:MRK)’s leading cancer treatment, Keytruda, has received approval for a wide range of indications. Recently, the company announced that a Phase 3 trial for Keytruda in a specific type of ovarian cancer met its primary goal of improving progression-free survival, though it did not achieve the secondary goal of extending overall survival. Currently, Keytruda is approved in the US for 40 different oncology indications, and Merck is working to gain similar approvals in key international markets, such as the European Union and Japan, where these indications have not yet been authorized.

In the third quarter of 2024, Keytruda’s sales rose by 17% year-over-year, reaching $7.4 billion. This performance was also highlighted in GreensKeeper Asset Management’s Q3 2024 investor letter. Here is what the firm shared:

“Merck & Co., Inc. (NYSE:MRK) was our second-largest detractor this quarter, declining -8.3%. MRK’s leading HPV vaccine, GARDASIL 9, faced challenges internationally due to inventory buildup within its Chinese distributor, which is expected to reduce shipments for the remainder of 2024. Despite this short-term impact, the long-term outlook for GARDASIL 9 remains promising. Meanwhile, the company’s $27 billion Keytruda cancer juggernaut continues to grow at a healthy clip, powering earnings growth.”

Overall, Merck & Co., Inc. (NYSE:MRK) reported revenues of $16.66 billion, representing a 4.3% increase compared to the same period last year. The company’s pipeline is advancing and expanding, reflecting its success in building a sustainable innovation framework and positioning itself with a more diversified portfolio to support future growth.

Of the 900 hedge funds tracked by Insider Monkey at the end of Q3 2024, 86 funds held stakes in Merck & Co., Inc. (NYSE:MRK), down from 96 in the previous quarter. The collective value of these stakes is over $7.1 billion. With over 14.6 million shares, Fisher Asset Management was the company’s leading stakeholder in Q3.

Overall MRK ranks 5th on our list of the best dogs of the Dow dividend stocks. While we acknowledge the potential of MRK as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than MRK but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock. 

READ NEXT: 8 Best Wide Moat Stocks to Buy Now and 30 Most Important AI Stocks According to BlackRock.

Disclosure: None. This article is originally published at Insider Monkey.