Dow Jones Industrial Average Offers Solid Dividend Ideas
If you’re looking for sexy stocks to impress your friends at the next cocktail party, this index isn’t for you. But if you like good, old-fashioned dividends, then you’ll like the Dow Jones Industrial Average just fine.
The Dow Jones sometimes gets a bad rap. Its 30 holdings represent only a small fraction of the U.S. stock market. The price-weighted methodology means a high-priced stock like 3M has six times the weight of a low-priced stock like Cisco.
But as a source of income ideas, the Dow Jones Industrial Average is great. These are no fly-by-night operations. The list reads like a “who’s who” of world-dominating businesses, cranking out monster profits year after year.
Most of this cash is passed right on to shareholders. Simple. Stable. Profitable. The index features some of the most reliable dividend stocks in the market.
With that preamble, let’s take a look at the top-yielding stocks of the Dow Jones Industrial Average.
|Merck & Co.||3.3%|
Source: Yahoo! Finance
This is not a list of buy recommendations. That said, there are a few good income ideas on this list.
Verizon Communications Inc. (NYSE:VZ) sports one of the highest yields around. The stock has also inspired about as much excitement as a mashed potato sandwich. Everyone knows the landline business died years ago and future growth will be meager at best.
Then again, no one expects a stock yielding four percent to produce much in the way of earnings growth. You’re getting yield and not much else. That said, patient shareholders collecting their dividends will likely crush most other investors as the decades go by.
Exxon Mobil Corporation (NYSE:XOM) has done the impossible. This company has paid a dividend to shareholders for over a century. In fact, this dividend champion hasn’t skipped a payment since 1882—only a few years after the invention of the light bulb.
Think about everything that has happened over that time: wars, bubbles, depressions, and more. For Exxon, though, it hardly mattered. Through almost every downturn in American history, XOM shareholders could always count on a dividend check arriving in their mailboxes.
Finally, a name you don’t often see on a list of dividend stocks: International Business Machines Corp. (NYSE:IBM). This company is a cash machine. Management is focused on milking operations and funneling the profits to shareholders.
If you combine dividends and share buybacks, IBM sports a total shareholder yield in the high single-digits. There are not many places where you can find a yield like that today. No wonder Warren Buffett is backing up the truck on this stock.
All this said, however, there’s more to dividend investing than just picking out names with the highest payouts. Yield and share prices move in opposite directions. A big payout might indicate investors are worried about the business or that the current dividend is unsustainable.
Chevron Corporation (NYSE:CVX) has me a little worried. With such a high distribution, there’s not a lot of cash left over for new investments. If oil prices take another leg lower, this dividend could be in trouble.
Caterpillar Inc. (NYSE:CAT) has some question marks, too. No need to fret over the dividend, though. The equipment-maker is generating plenty of cash to pay shareholders.
The global economy, however, may keep investors up at night. A Chinese slowdown could crimp demand for equipment of all types, putting a big dent in Caterpillar’s profits. Shareholders may be collecting income, but it might not to be enough to offset losses from a falling share price.
Bottom line: if you’re looking for dividend stocks, the Dow Jones Industrial Average is a great place to start. Just be sure to dig into the financials first. You want to ensure you’re buying a solid payout and not a dividend time bomb.