The premise makes enough basic sense -- dividend income is good, so more dividend income is better. Therefore, if you want dividend income, make a point of buying higher-yielding stocks. Veteran investors know things aren't quite this simple, though. There's always more to the story. For instance, is the dividend in question actually going to be paid in the future, or is the underlying stock itself likely to lose value? What if you limited your options to the blue-chip stocks that make up the Dow Jones Industrial Average(DJINDICES: ^DJI)?
While no one can see the future, these are reasonable questions.
Image source: Getty Images.
Putting things in their proper perspective
At the risk of being oversimplistic, there's more to the matter than yield alone. Dividend yields are often inflated due to a stock's decline in anticipation of a dividend cut, for instance. Or, maybe that ticker's payout hasn't grown in some time and isn't likely to grow anytime soon. If you hold that stock long enough, eventually you'll lose ground to inflation.
Still, if your priority is generating immediate investment income, bigger yields are at least the right starting point, provided you do all the other necessary due diligence.
One could argue that being included in the Dow is due diligence. Standard & Poor's handpicks the Dow's 30 holdings based on nothing but qualitative factors, after all, with the goal of representing the best of America's business landscape. It's not a crazy idea. Even though these 30 companies are regularly swapped out as the business world itself evolves, few would deny that the Dow Jones Industrial Average is a pretty good snapshot of American ingenuity and resiliency.
That's not quite what dividend-seeking investors are worried about, though. While they can certainly appreciate resiliency, their chief concern is producing income now, with a growing amount of income later.
Enter Verizon Communications(NYSE: VZ), Chevron(NYSE: CVX), and Merck(NYSE: MRK), the Dow's three highest-yielding constituents at this time, with trailing-12-month dividend yields of 6.3%, 4.9%, and 4%, respectively. Are any or all of these stocks a buy for income-seeking investors simply because they're Dow names, or are their yields above average just because their stocks are struggling due to danger on the horizon?
In this case, they're all three buys -- if your chief goal is income. Being Dow stocks, however, has little to do with that decision. As is always the case, these bullish calls are being made on a case-by-case basis.
A deeper dive into the Dow's highest-yielding stocks
Take Verizon as an example. While there's no reason to expect any great growth from within the nation's highly saturated and fully matured mobile telecom business, there's every reason to believe this company will be able to continue driving profitable revenue that fully funds continued dividend payouts.
For better or worse, Americans are essentially addicted to their smartphones. A study performed by Harmony Healthcare IT suggests the average U.S. resident spends more than five hours every day looking at their handheld connection to the digital world. Separately, data from Reviews.org indicates that Americans check their phone -- unprompted – over 200 times a day, while nearly four out of five people report feeling uneasy with the idea of leaving their home without the mobile device.
Connect the dots. While we may eventually embrace somewhat healthier smartphone habits, Verizon's core business is almost certainly here to stay. Price increases should mean this stock's dividend growth keeps up with inflation.
Chevron's future isn't quite as rock-solid, but it's going to be fruitful for long enough to make this name a solid buy for the time being.
Yes, renewable energy sources are eventually going to displace fossil fuels. Don't hold your breath, though. Goldman Sachs says the world won't reach so-called “peak oil demand” -- the point at which global oil consumption begins a permanent decline -- until 2035. Even for many years after that, we'll still need hundreds of millions of barrels of it every day. Although it's a somewhat self-serving outlook, Chevron's rival ExxonMobil predicts the world will need just as much crude oil in 2050 as it will likely need in 2030.
Like Verizon, Chevron enjoys enough scale and low-cost production to sustain its dividend well into the future.
And Merck? It's not exactly a big-time growth machine either, even if its well-proven cancer-fighting drug, Keytruda, has yet to reach its peak annual sales of around $34 billion, which GlobalData and other analysts expect to see by 2028 (when the miracle drug will start losing key patent protections). It needs a replacement -- or several replacements -- for the oncology drug that currently accounts for roughly half the drugmaker's revenue. Concern over this brewing headwind is the key reason Merck shares have been falling since early 2024.
What too many investors are overlooking, however, is the fact that Merck's developmental pipeline is actually quite promising. The company reports that it could win approvals for as many as seven cardiometabolic drugs by 2030, with a combined annual revenue potential of $15 billion just a few years after that. All told, the pharmaceutical giant believes it has 20 potential blockbusters currently in development that could collectively generate $50 billion in annual revenue within a decade.
Even allowing for a bit of self-promotion on Merck's part, the promise of its R&D pipeline isn't being reflected in its stock's current price.
Worth owning, but not due to their inclusion in the index
If you're looking for reliable dividend income that's also likely to grow indefinitely, the three highest-paying dividend stocks in the Dow Jones Industrial Average will do nicely. And to be sure, there's an unquantifiable upside to these names being included in the blue chip index.
Just don't read too much of this benefit into the matter. These are solid dividend stocks mostly because their underlying companies are built to last and capable of thriving in nearly any environment. You could certainly find similarly solid names outside of the Dow as well.
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James Brumley has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chevron, Goldman Sachs Group, Merck, and S&P Global. The Motley Fool recommends Verizon Communications. The Motley Fool has a disclosure policy.
