Collectively, the 30 Dow Jones Industrial Average stocks are meant to represent the entire stock market. But as with any group, there are some that do things well … and some that bring up the rear.
One particular area of divergence is how Dow components pay dividends. The top 10 Dow dividend stocks offer yields as high as 6% — while the lower portion of these 30 components can’t even crack the 1% mark.
Some flat-out refuse to pay a decent dividend, hoarding their profits. Yes, dividend payout ratios are low across the board at about half their normal levels — roughly 25% compared to 50% payout ratios historically. But some Dow components are lower even than that. And then, of course, are the battered stocks that are flat-out incapable of increasing payouts because of poor operations.
Although the dividend yield for the broader market is pretty paltry at just south of 2%, these dead dividend stocks can’t even hop over that low bar.
To be clear, many of these stocks might be decent swing trades — and I’ll be the first to admit that some of these stocks I personally have singled out as good buys from a share appreciation perspective. But for the purpose of this conversation, we’re talking about investing from an income perspective — and if you’re an investor that places emphasis on yield first, you should put these seven dead Dow dividend stocks on your list of investments that don’t make the cut.
Let’s take a look:
Dividend Yield: 1.7%
Payout Ratio: 24%
From a trader’s perspective, Caterpillar (NYSE:CAT) is a pretty good play. It’s one of InvestorPlace.com’s 10 Best Stocks for 2012 and one of my personal Editor’s Picks. However, for dividend investors, the trouble with Caterpillar is that the stock just isn’t forking over the cash.
Caterpillar yields a paltry 1.7%, easily below the average headline yield, and boasts a payout of just 24% of its profits.
Caterpillar isn’t as bad as some of the other stocks on this list. But it’s certainly no friend to income investors with a weak payday like that.
Dividend Yield: 1.5%
Payout Ratio: 10%
With tech giant Cisco (NASDAQ:CSCO), you start to see the worst the Dow Jones Industrial Average has to offer. A meager 1.5% yield, and just 10% of the profits given back to shareholders? That’s not winning over any friends in the income investing crowd.
Cisco admittedly has been rallying recently, riding the strength of the tech sector and tacking on 16% gains year-to-date — double the broader Dow Jones average. But its five-year return is an ugly -20%.
A poor dividend, poor long-term performance and massive restructuring announced last year that is boosting numbers through cuts and not growth? Doesn’t sound like the kind of dividend stock most income investors should be looking for right now.
Dividend Yield: 1.4%
Payout Ratio: 22%
International Business Machines (NYSE:IBM) is a high flyer in many respects, and has surged about 140% since Jan. 1, 2009. But as much fun it is to lionize Watson for his Jeopardy appearance — and his knack for playing doctor or librarian — there are serious concerns about IBM’s dividend.
For starters, why is the payout ratio so low and the yield so pathetic given the recent successes of the company? IBM has paid dividends for almost a century, dating back to 1916, so it certainly knows better. Maybe the company just doesn’t care.
Consider that IBM has spent over $80 billion on share buybacks in the last seven years. Based on current shares outstanding, the company could have paid an extra $10 a share each year since 2004! Seems like IBM had other priorities than dividends.
#4: Walt Disney
Sure, times are tough for the entertainment and tourism industries amid persistently high unemployment and uncertain consumer spending — but Walt Disney (NYSE:DIS) isn’t exactly doomed. The stock is up against an all-time high and is well above its pre-recession peak.
But has that resulted in bigger dividends for shareholders? No way.
Well, to be fair, Disney did up its payout 50% just a short while ago (something I personally applauded) — from 40 cents annually to 60 cents — but that moved the yield from a pathetic 1.1% to an only slightly more respectable 1.4% at current valuations.
However, if you’re a long-term investor with an eye for dividends, you had better think twice if you expect Disney to do this again anytime soon. The dividend will remain meager — and with the stock against an all-time high, there now is a very real risk of buying a top.
#3: American Express
Dividend Yield: 1.3%
Payout Ratio: 13%
American Express (NYSE:AXP) crashed and burned with the rest of the financial sector across 2008 and early 2009. But it has come roaring back from its recession-era lows, adding more than 460% to its share price in about three years.
The funny thing is, though, American Express only recently upped its dividend to 20 cents after sticking with a meager 18 cents per share per quarter for every payout dating all the way back to Q3 2007. Granted, the Fed had to sign off on the increase. But you have to wonder what took so long — and why, even after a modest 11% hike in the dividend, the payout ratio remains a tightwad 13%.
It’s true that financial stocks aren’t out of the woods and bad debt remains a problem. But AXP shares have shown no sign of slowing down, profits continue to recover and shares keep soaring.
Why hasn’t the dividend been keeping up? And what incentive does American Express have to announce another increase after the recent Fed-approved hike?
Dividend Yield: 1.2%
Payout Ratio: 22%
Alcoa (NYSE:AA) is a strange name for this list, considering I picked it as my top stock to buy and hold for 2012. But the thing is, a stock that hopefully can deliver big returns across several months isn’t the same as a reliable dividend investment. In fact, Alcoa has the second-lowest dividend yield out of the entire Dow Jones Industrial Average.
And if I’m right about the share appreciation for Alcoa, that yield is only going to get smaller as valuation increases for shares.
Consider that Alcoa paid a dividend of 17 cents a share from January 2007 until March 2009 — when it slashed the payout to just 3 cents quarterly, where it has remained ever since.
Consider that revenue remains under 2008 levels, meaning the probability of a big-time dividend hike is pretty low.
So … what’s an income investor to like about Alcoa?
#1: Bank of America
Dividend Yield: 0.4%
Payout Ratio: 400% (based on 2011 earnings)
Bank of America (NYSE:BAC) was smart enough to not even petition the Federal Reserve for a dividend increase after the latest round of bank “stress tests.” Obviously, the fact the bank pays out more than 100% of its profits in dividends is a sign that there isn’t much room to increase that payday.
So, Bank of America is looking good compared with the other skinflint dividend payers, right? Wrong. The problem isn’t that Bank of America is unwilling to part with a large share of its profits … it’s that BofA has almost no profits to speak of based on fiscal 2011 performance — and that means no dividend for you.
Consider that full-year adjusted earnings for 2011 tallied just a penny a share. So its paltry 1 cent payout per quarter means the company was paying out four times its profits despite yielding a meager 0.4%.
Sure, the financial stock is slated to earn 72 cents a share for fiscal 2012 … but when it comes to financial stocks and their earnings or dividends, most income investors should have learned by now that it’s awfully risky to hope or expect for the best to happen.
Jeff Reeves is the editor of InvestorPlace.com, and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at firstname.lastname@example.org or follow him on Twitter via @JeffReevesIP. As of this writing, Jeff did not hold a position in any of the aforementioned securities.