The big draw for investors with Dow Inc. (NYSE: DOW) is its huge 7.8% dividend yield. While that will clearly be attractive to income investors, it has to be juxtaposed against the company’s business risks. There are reasons some investors might want to buy or hold Dow, but selling (or avoiding) it is also an equally worthy choice. Here’s a look at the buy, sell, and hold calls for this chemical maker.
Buy Dow Inc.
If you are looking for a stock with a lofty dividend yield, Dow with its 7.8% yield fits the bill. To put some perspective on that, the S&P 500 index is only yielding around 1.2% today. Dow Inc. just announced a $0.70 per share quarterly dividend, which keeps the payment at the same level it has been at since its 2019 separation from DowDuPont.
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The business backing that yield is a diversified $25 billion market cap industry leader. It basically operates across all of the major chemical segments. If you are looking for a chemical company, it covers a lot of ground. That said, a big yield backed by a static dividend may not be the best selling point for all investors. And it highlights some notable risks.
Sell (or avoid) Dow Inc.
If a growing income stream matters to you, Dow won’t be a good choice. Given the volatile nature of the chemicals industry, meanwhile, it seems unlikely that Dow will ever be a dividend growth stock. But there’s more to the negative story here than just the lack of dividend growth.
For example, the company has been working to revamp its business model. That has included selling assets and partnering with other companies in an effort to reduce leverage and cut costs. These aren’t bad things to be doing, but they do add uncertainty. Given that the dividend payout ratio is over 100%, uncertainty isn’t a good thing for a dividend stock like Dow.
The current high yield, meanwhile, is also a function of Dow’s weak business performance. It closed out 2024 with sales down 2% year over year in the fourth quarter and off 4% sequentially from the third quarter of the year. While volume was up 1% year over year, it was down 1% sequentially. And prices were lower by 3% year over year. That is hardly the type of performance that investors would get excited about.
Hold Dow Inc.
The main reason to hold on to Dow is that you have a glass-half-full view of its efforts to improve its business. While not exactly a turnaround story per se, it is pretty clear that this chemical company is trying to get its business to a better place. As noted, that includes selling assets and inking partnerships. If those efforts work out and performance improves, Dow’s stock could move higher.
DOW data by YCharts
Given that Dow’s stock has lost about a third of its value over the past year, however, holding would be something of a contrarian call. Most of Wall Street appears to have a dour view of Dow’s future. You could also capture the losses here and use them to offset gains elsewhere in your portfolio. And if Dow does start to see its overhaul efforts producing fruit, you could buy the stock back (after at least 30 days to avoid the wash sale rule, of course).
Not a compelling story for Dow Inc.
There are some high-yield stocks that are easy to love, like Enterprise Products Partners and Realty Income. But there are a lot more that aren’t nearly as attractive. Dow Inc. falls into the latter category. It has a high yield, but its business isn’t firing on all cylinders and management is actively looking for ways to reduce debt and improve performance.
Unless you are a contrarian, most investors will probably want to stay on the sidelines here for now.
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Reuben Gregg Brewer has positions in Realty Income. The Motley Fool has positions in and recommends Realty Income. The Motley Fool recommends Enterprise Products Partners. The Motley Fool has a disclosure policy.
