7 Blue-Chip Stocks That Will Outperform the Dow in the 5 Five Years (2024)

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Blue-chip stocks are associated with a low-beta, stable returns, and passive dividend income for investors. However, not all blue-chip stocks are comparable when it comes to returns over a time-frame. There will be stocks that significantly outperform or underperform relative to the index. The focus of this column is on blue-chip stocks to outperform Dow in the next five years after a weak performance in the last five.

I have looked at fundamentally sound ideas with a healthy dividend yield. The question would be on why these blue-chip stocks have been laggards. Stocks and industries go through bull and bear phases. At times, there is no price correction, but time correction. These deviations from fundamentals provide a good buying opportunity.

Nvidia (NASDAQ:NVDA) is a good example from the recent past. In the last five years, NVDA stock has surged by 2,000%. However, the best part of these returns has come in the last 12 to 15 months.

Let’s therefore talk about seven blue-chip stocks to outperform the Dow.

Lockheed Martin (LMT)

Global defense spending has been increasing with heightened geopolitical tensions. This factor makes Lockheed Martin (NYSE:LMT) stock an interesting pick among blue-chip names.

It’s worth noting that LMT stock has remained subdued in the last 12 months. Valuations look attractive and the stock offers a dividend yield of 2.84%. I expect a sustained rally in the stock backed by encouraging business news.

The first positive to note is that Lockheed ended 2023 with a record order backlog of $160.6 billion. The order intake has been robust and this sets stage for revenue growth acceleration. This is a potential catalyst for LMT stock trending higher.

Further, Lockheed has guided for free cash flow of $6.2 billion for the year. With revenue growth visibility, I expect higher FCF in the next few years. This will translate into higher dividends and share repurchase.

I must add that Lockheed has been investing in next-generation defense technology. This includes areas of hypersonic solutions, directed energy, among others. Innovation is likely to ensure that the Company stays ahead of the curve. This makes it one of those blue-chip stocks to outperform the Dow.

AstraZeneca (AZN)

It’s almost two years that AstraZeneca (NASDAQ:AZN) stock has traded sideways. This does not come as a surprise with biopharmaceutical stocks being out of focus on a post-pandemic world. However, the time correction is overdone with attractive growth opportunities for AstraZeneca. At a forward price-earnings ratio of 16.4, AZN stock is worth grabbing with both hands.

The first catalyst for growth is a deep pipeline of drugs. Currently, the Company has 178 projects in the pipeline. Of these, 17 new molecular entities are in the late-stage pipeline. An important point to note is that ten Phase III trials have been initiated with blockbuster potential. This is likely to provide visibility for healthy revenue bump-up on commercialization.

Another growth catalyst is the Company’s presence in diversified geography. For 2023, AstraZeneca reported revenue growth of 20% in emerging markets. However, in EMs (excluding China), revenue growth was stellar at 35%. I believe that new geographies will increasingly contribute to overall growth.

Barrick Gold (GOLD)

Gold mining stocks have remained subdued even as gold trends higher. I believe the outlook for gold is bullish for the next few years. My view is supported by factors that include potential rate cuts, geopolitical tensions, and central banks buying gold. It’s therefore likely that quality gold mining stocks will breakout on the upside.

Barrick Gold (NYSE:GOLD) is among the best names to consider for returns that best the index. GOLD stock trades at an attractive forward price-earnings ratio of 16.3 and offers a dividend yield of 2.53%. With higher realized gold price, Barrick is positioned to create value.

As an overview, Barrick has some of the top tier one gold mines in the world. As of December 2023, the Company reported 77 million ounces of proven and probable mineral reserves. It’s interesting to note that Barrick has delivered replacement of over 140% of the gold reserve depletion since 2019.

From a financial perspective, Barrick reported operating cash flow of $3.7 billion for 2023. With gold near $2,200 an ounce, OCF is likely to be significantly higher this year. This will translate into higher dividends and increased flexibility to invest in exploration projects.

AT&T (T)

If we look at the last five years, AT&T (NYSE:T) stock has declined by 28%. Clearly, it’s been an extended period of underperformance. This is likely to reverse in the next five years with T stock trading at a deep valuation gap. A dividend yield of 6.47% is also attractive.

My bullish view is not just based on the valuation factor. AT&T has witnessed positive business and financial developments. Last year, the Company reported free cash flow of $16.8 billion. For the current year, AT&T has guided for FCF of $17 to $18 billion. Therefore, there is ample flexibility for dividends and deleveraging.

I am also encouraged by the developments in the phone and fiber subscription trends. Last year, the number of subscribers continued to swell. At the same time, the average revenue per user has increased. The ARPU growth coupled with cost cutting initiatives will ensure EBITDA margin expansion and further upside in FCF. All in all, it’s one of those blue-chip stocks to outperform the Dow.

With deleveraging, the Company’s credit metrics have also been improving steadily. With all these positives, it’s a matter of time before T stock skyrockets.

Ford Motor Company (F)

Ford (NYSE:F) is possibly among the most undervalued names in the list of automotive majors. F stock trades at a forward price-earnings ratio of 6.9 and offers a dividend yield of 4.65%.

In my view, Ford is uniquely positioned in the following sense. The Company is pursuing a gradual transformation towards a portfolio of EVs. However, the electric vehicle sector has faced headwinds in the recent past. If EV adoption witnesses renewed acceleration, Ford will continue to invest towards portfolio transformation. On the other hand, if EV adoption remains relatively sluggish, Ford can recalibrate its growth plans. This is not possible for a pure-play.

From a financial perspective, Ford reported revenue growth of 11% for 2023 to $176.2 billion. For the same period, the Company reported healthy adjusted free cash flow of $6.8 billion. In the United States, Maverick and F-150 have been the top two bestselling among hybrid trucks. In China, exports increased by 50% with the asset-light strategy delivering results.

Overall, with high financial flexibility and healthy deliveries, F stock is due for re-rating. Once that happens, the upside potential is significant.

Rio Tinto (RIO)

Rio Tinto (NYSE:RIO) stock has returned 15% in the last five years. It’s clearly among the most undervalued blue-chip stocks and trades at a forward price-earnings ratio of 7.9. Further, RIO stock offers a generous dividend yield of 8.14% and I believe that dividends are sustainable.

In the coming quarters, potential rate cut is a reason to be bullish on Rio Tinto. With global GDP growth being sluggish, expansionary monetary policies are likely globally and will support growth. Industrial commodities tend to perform in times of easy money policies. I therefore expect a breakout rally relatively soon.

I must add here that Rio Tinto has strong fundamentals. In the last five years, the Company has reported an average annual free cash flow of $10.6 billion. High financial flexibility has allowed Rio to invest in growth projects. Besides iron ore, the Company has also focused on metals like aluminium and copper. These metals are likely to remain in demand on the back of global energy transition.

Vale (VALE)

I am tempted to talk about another industrial commodity blue-chip stock. Vale (NYSE:VALE) has remained sideways (amidst volatility) in the last five years.

VALE stock seems massively undervalued at a forward price-earnings ratio of 4.7. Further, the stock offers a dividend yield of 9.2%. Considering the valuations, I would not be surprised if there is a big breakout for VALE stock in the coming quarters.

In December 2023, Vale reported highest monthly iron ore output since 2018. This segment has witnessed operational stability and remains the cash flow driver. At the same time, Vale continues to focus on boosting production of energy transition metals. For Q4 2023, copper production increased by 50% to highest levels since 2018. Further, nickel production was in-line with the guidance.

An important point to note is that Vale reported free cash flow of $2.5 billion for Q4. An annualized FCF potential of $10 billion provides high flexibility for dividends and aggressive capital investments. Vale also has a strong balance sheet with a net-debt of $16.5 billion as of Q4 2023. With all these positives, I expect VALE stock to surge higher from current levels. It’s also one of those blue-chip stocks to outperform the Dow.

On the date of publication, Faisal Humayun did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.comPublishing Guidelines.

Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modeling. Faisal has authored over 1,500 stock specific articles with focus on the technology, energy and commodities sector.

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