The three highest-yielding Dow Jones Industrial Average stocks today are Verizon Communications (NYSE: VZ), Dow Inc. (NYSE: DOW), and Chevron (NYSE: CVX). Are any of these stocks worth buying? The answer isn’t exactly easy. And while there’s one that investors should feel pretty comfortable buying today, all three really end up being a bit complicated.
What is the Dow?
The Dow Jones Industrial Average is an oddity on Wall Street in a number of ways. For starters, though it’s meant to be a broad gauge of market performance, it holds a very small number of stocks (30). And then there’s the weighting method, which is influenced by high stock prices, versus most other indexes that weight by market cap. And yet it has done a fairly good job of tracking the market over time, with the stocks in the index selected based on their economic importance.
Indeed, it remains relevant even as other indexes, like the S&P 500 index, have taken center stage. In fact, the Dogs of the Dow method, which is based on buying the highest-yielding Dow stocks, is revered by income investors as a way to find out-of-favor companies that provide attractive income streams. The top three high yielders today, as noted above, are Verizon, Dow, and Chevron.
Chevron is an all-weather energy stock
Chevron is probably the most attractive of the trio. It is a globally diversified integrated energy company. That means that it owns energy assets across the entire energy landscape, from the upstream (production) through the midstream (pipelines) and to the downstream (refining and chemicals). Each of these segments of the energy sector has a different operating profile and including them all in the portfolio helps to soften the inherent ups and downs of oil and natural gas prices.
The proof is in the dividend pudding here, with Chevron having increased its dividend annually for an incredible 37 consecutive years. If you are looking for income from an energy company, Chevron is highly likely to work out well for you over time. That said, the 4% dividend yield is only about middle of the road for the stock, historically speaking. This is not a screaming buy, but when the broader market is yielding close to 1.3%, Chevron could be a worthwhile addition to your income portfolio. If you have a value bent, meanwhile, keep Chevron on your wish list for the next energy downturn when the yield could spike toward 10%.
Dow offers a volatile business and no dividend growth
Dow Inc. hails from the downstream segment of the energy sector. This is an interesting area to operate in because oil and natural gas are key inputs and their prices can be highly volatile. But the prices of the chemicals that Dow makes can also be volatile. So Dow faces material risk on both the cost and revenue sides of its business. It is not a stock that conservative investors will likely find attractive even though the dividend yield is a lofty 5.1%.
But what’s most notable here is the lack of dividend growth. Dow’s dividend has been stuck at $0.70 per share per quarter for years. And given the variability of its business model, it doesn’t really make much sense for the board to start hiking the dividend because an industry downturn would likely require it to be cut. It is far better that the dividend be held at a level that is supportable through the cycle. If you are trying to maximize the income your portfolio generates and you have a short-term focus, Dow could be a good option. But without dividend growth, inflation will eat away at the buying power of the dividend over time.
Verizon’s business faces stiff competition
There are a lot of things to like about Verizon’s telecommunications business. For starters, it is one of the largest cellphone companies in the United States. It would be hard to unseat it. Cell phone customers also tend to be fairly loyal, which creates an annuity-like income stream to support the stock’s hefty 6.8% dividend yield. The dividend, meanwhile, has been increased for two decades, which speaks to the strength of the business model.
There’s only one problem: It costs a lot of money to build and support a large cellphone network. And while Verizon has that network in place, it can’t rest on its laurels. It has to constantly invest in maintaining the quality of the network. To afford that Verizon tends to carry a lot of debt. In fact, Verizon’s debt-to-equity ratio, a measure of leverage, is higher than either of its closest peers. Verizon’s business is strong and it should be able to support a progressive dividend, but you’ll want to keep a close eye on the balance sheet if you step aboard. Ultra conservative investors, meanwhile, might decide that the leverage risk is too high.
There’s no slam dunk here
The most attractive dividend stock on this list is probably Chevron, but even there you have to take the story with a grain of salt. Given the nature of the energy sector, a patient investor could probably buy Chevron with a much higher yield. Dow is probably the least attractive, given the likelihood of the dividend staying stuck at its current level indefinitely. Verizon falls somewhere in the middle, but the relatively high leverage will probably dissuade conservative types from buying it.
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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chevron. The Motley Fool recommends Verizon Communications. The Motley Fool has a disclosure policy.
Should You Buy the 3 Highest-Paying Dividend Stocks in the Dow Jones? was originally published by The Motley Fool
