Top 10 Dow Dividend Stocks

by Jeff Reeves | August 20, 2012 4:24 pm

CashRich185 Top 10 Dow Dividend StocksIt has been a quiet August on Wall Street by all accounts. Despite the continuing threat of a European debt crisis and the looming “fiscal cliff”[1] at home, despite persistently high unemployment in the U.S.[2] and fears of a slowdown in China, the stock market continues its march upward. The Dow Jones Industrial Average is up more than 8% on the year and more than 3% in the past 30 days.

So will the party continue as we march into the end of 2012, with an ugly presidential election looming and an admittedly sluggish recovery? Maybe. Stocks continue to climb the proverbial “wall of worry,” and it’s hard to argue with the gains seen so far this year.

However, many investors have been burned by the volatility of the past several years and are looking to mitigate their risk. That means lower-risk investments — chief among them, high-yield blue chips that provide stability. Such defensive companies allow investors to ride broad market rallies through share appreciation, but also can withstand tough times or provide good income potential if the market moves sideways.

Whether you’re looking for a low-risk way to ride the market rally or whether you’re looking for a safe place to park your cash, high-yield dividend stocks have a lot to offer. And these top 10 Dow dividend stocks are some of the best picks out there right now if you’re looking for investment ideas.

#10: JPMorgan Chase

JPMorgan185 Top 10 Dow Dividend StocksCurrent Dividend Yield: 3.2%
Performance So Far in 2012: +12%

JPMorgan Chase (NYSE:JPM[3]) might be slightly ahead of the Dow’s 8% gains year-to-date, but it’s off nearly 20% from its peak earlier this year. The reason for the rollback should be obvious — the “London Whale” loss[4] that ultimately shaved $4 billion off earnings[5], and continued scandal in the financial industry[6].

While the recent declines make sense, however, the longer-term recovery in JPM during the past few years also makes sense too. The business is arguably the strongest of the major banks and pays a juicy dividend. JPM was granted Federal Reserve permission to raise its dividend in March[7], even as competitors like Citigroup (NYSE:C[8]) and Bank of America (NYSE:BAC[9]) have failed to improve their payouts beyond a nominal penny per quarter in dividends. That’s not to say Ben Bernanke and others at the Fed are geniuses, but it’s a vote of confidence for JPM.

If you’re a long-term investor, you might want to consider JPM stock. Although financials are understandably a lightning rod for politicians and investors alike, the bottom line is that any broader recovery cannot happen without financials coming along for the ride.

#9: General Electric

GeneralElectric Top 10 Dow Dividend StocksCurrent Dividend Yield: 3.2%
Performance So Far in 2012: +17%

General Electric (NYSE:GE[10]) has come fighting back as a viable dividend investment after its infamous dividend cut during the financial crisis. Consider that in April 2011, GE paid 14 cents each quarter. By the summer it was paying 15 cents, and by January 2012 it was up to 17 cents a quarter. And earlier this year, regulators signed off on a special dividend from GE Capital[11] along with permission for the group to resume paying regular dividends going forward.

Payouts aren’t back to pre-recession levels, but this progress is significant.

GE posted mixed earnings in July[12] as profit slipped, in part because of pension expenses and a drop in demand for its wind turbines. But the company is getting some of its swagger back[13]. The aforementioned GE Capital arm has mended significantly, and since the company’s finance and energy businesses account for 70% of revenue, that’s a big deal.

Obviously, an up economy would mean improved profits for GE’s core businesses. But the nice yield and increasing strength in its operations mean this might be a good time to invest in GE with the hopes of a recovery.

#8: Intel

intel Top 10 Dow Dividend StocksCurrent Dividend Yield: 3.4%
Performance So Far in 2012: +8%

Intel (NASDAQ:INTC[14]) might have gotten the axe from Buffett’s portfolio[15] as Berkshire Hathaway (NYSE:BRK.B[16]) trimmed its position in this stock, but Intel remains one of the biggest dividend payers in the whole tech sector.

A 3.4% yield makes this Dow component one of the 10 top dividend payers, and that’s attractive in and of itself. However, any investor who has been around the block understands that a long-term dividend portfolio should be diversified as well as high-yielding, and Intel plays a vital role in giving tech exposure but without stomaching a middling 2% yield.

As a chip manufacturer, Intel is very much a cyclical stock — without consumer demand for electronics or businesses buying new hardware, INTC is going to see headwinds. That’s what has happened in the past five years as Intel has largely bounced around between $20 and $26 per share since the beginning of 2008.

Shares remain at the top of that range, but with a P/E of about 10.3, it’s hardly like INTC is one of those super-growth tech stocks that investors are overreaching to buy.

Semiconductors and chips will always have strong baseline demand, and as the No. 1 manufacturer in the world, Intel remains a stable tech stock with an attractive yield. And while growth isn’t off the charts, Intel is still expanding by focusing on mobile semiconductors and Ultrabook sales[17].

#7: Procter & Gamble

ProcterGambleLogo Top 10 Dow Dividend StocksCurrent Dividend Yield: 3.4%
Performance So Far in 2012: Flat

Procter & Gamble (NYSE:PG[18]) recently made our list of 10 dividend stocks left behind in 2012[19] because, admittedly, the stock hasn’t doing squat on a share appreciation basis. However, Procter & Gamble CEO Bob McDonald[20] has a big long-term plan that involves fighting rising commodity costs and finding growth overseas. It also just posted pretty strong Q4 earnings[21].

And let’s face it: Even though the consumer products giant is slightly down, it is hardly out. P&G is going nowhere thanks to brands like Gillette, Pampers and Duracell that provide reliable revenue across rough economic times — and thus reliable dividend payments, too.

Yes, PG stock hasn’t seen much growth. But you can’t get more defensive than consumer staples.

And longer-term, there’s a chance that Procter & Gamble will benefit very nicely from changing currency exchange rates. A strong dollar and weaker euro have weighed on the earnings of this multinational. But if the dollar drops on continued debt troubles and the EU gets its act together, a nice currency tailwind could help out in a year or so even if all other things remain equal.

#6: DuPont

DuPontLogo e1282585884678 Top 10 Dow Dividend StocksCurrent Dividend Yield: 3.4%
Performance So Far in 2012: +10%

E.I. du Pont de Nemours & Co. (NYSE:DD[22]), colloquially known just as DuPont, is a chemicals giant with more crazy plastics and coatings than you can shake a synthetic stick at. Products include including Tyvek house wrap, Teflon non-stick coatings and stretchy Lycra synthetic fabrics.

Obviously, these items aren’t as sexy as a slick smartphone or a luxury automobile. But the innovation is clear at DuPont, and its reach is broad, so it doesn’t really have to worry about one sector or one set of economic data points. This makes it a great long-term investment.

DD stock admittedly lagged the market in 2011 with an 8% decline but has topped the Dow slightly this year. It has refocused its strategy, including a pending sale of its auto paints business[23] to the Carlyle Group (NASDAQ:CG[24]) for about $5 billion.

And as InvestorPlace’s Dan Burrows points out[25], “The stock is trading 17% below its own five-year average on a forward earnings basis, while ROE is a very shareholder-friendly 30%.”

The icing on the cake is the 3.4% yield after DuPont added another 2 cents to its quarterly payday[26], proving this industrial company is not just preserving dividends — but improving them.

#5: Johnson & Johnson

JohnsonJohnsonLogo e1282585796958 Top 10 Dow Dividend StocksCurrent Dividend Yield: 3.6%
Performance So Far in 2012: +3%

Johnson & Johnson (NYSE:JNJ[27]) has raised distributions for 50 years in a row and has a 10-year dividend growth rate of 12.4% per year — making it one of the most reliable payers on Wall Street.

Of course, J&J stock hasn’t been a hit lately. Since the recession, the company has hit some headwinds thanks to quality control issues, product recalls and questions about management. But a new Johnson & Johnson CEO at the helm[28] is changing things and hoping to change all that in the months ahead.

A plus while you wait is the nice 3.6% dividends. And unlike some big pharma stocks that pay nice yields but might be gutted by patent expirations, JNJ consumer health offerings like Band-Aid and Tylenol provide its steadiest revenue stream beyond vaccines and prescription medical products.

Revenue admittedly has been a bit stagnant at J&J during the past few years; hence, the stock has seen some underperformance. But even on reduced projections, Johnson & Johnson could see a stunning 45% jump in earnings per share for fiscal 2012 compared with fiscal 2011. Time will tell if management can hit those targets, but in the meantime the dividend is a pretty nice hedge — even if the stock moves sideways.

#4: Pfizer

pfe Top 10 Dow Dividend StocksCurrent Dividend Yield: 3.7%
Performance So Far in 2012: +10%

I recently penned an article about the best stocks in pharma for dividends[29], and Pfizer (NYSE:PFE[30]) was one of the top picks on my list. It outperformed the market nicely in 2011 with one of the best returns in the entire Dow Jones[31] — 23% in gains, to be precise — and has a decent pipeline of future revenue

The balance sheet seems strong after first-quarter earnings, where, despite a small YOY drop in revenue, Pfizer saw a 25% increase in profits[32]. And thanks in part to good numbers lately, PFE is now outperforming the broader Dow Jones Industrial Average so far in 2012.

Looking forward, the company has a decent research pipeline with some up-and-coming drugs that could rotate in to prop up revenues. There’s also some restructuring going on, including an IPO for its animal health business[33]. Also, the company has $29 billion in cash[34] on the books — so even even if revenue hits a hiccup or some of the moves now don’t immediately pay off, the cash is there to preserve this juicy dividend.

#3: Merck

MerckLogo e1282588089406 Top 10 Dow Dividend StocksCurrent Dividend Yield: 3.8%
Performance So Far in 2012:
+16%

Merck (NYSE:MRK[35]) is similar to Pfizer (NYSE:PFE[30]) in many ways. It too faces patent expirations. It too is hoping its pipeline will step up to fill the void. And it too pays a huge dividend.

Merck apparently has answered one of the big questions about its pipeline, however, judging by a big jump in shares this summer. A new osteoporosis drug looks very promising for the drugmaker[36] and investors have piled in, driving up shares about 14% in just a month’s time. It’s now double the Dow Jones’ gains year-to-date in 2012 despite being relatively sluggish before that.

Additionally, the continued roll-in of the $41 billion Schering-Plough buyout from a few years ago surely will provide new opportunities for Merck. At the very least, it ensures the company won’t fade away.

Like cohort Pfizer, MRK is sitting on a huge war chest. Some $13.5 billion in cash and $1.4 billion in short-term investments keeps this pick pretty safe when it comes to writing the checks.

Earnings were ho-hum in the latest quarter[37], but the income potential of this dividend payer is a decent hedge. Dividends have been paid at Merck since 1935, and last year the payout was increased about 10%, from 38 cents a quarter to 42 cents. You might not find massive share appreciation in this stock, but you certainly will find stability.

#2: Verizon

VerizonLogo e1282588394281 Top 10 Dow Dividend StocksCurrent Dividend Yield: 4.6%
Performance So Far in 2012:
+9%

Verizon (NYSE:VZ[38]) has been labeled a sleepy telecom stock, but not in recent months. After being in the red this spring, VZ shares popped 13% since April to put this communications company actually ahead of the broader Dow Jones index. That was because of  some decent numbers, but mostly thanks to a massive demand for yield on Wall Street.

Big-picture, Verizon is one of the most secure plays out there. It remains the leading wireless telecom provider in the U.S. by subscriptions and gets 50% of its revenue from wireless subscribers. The company also is one of the top high-speed Internet providers in America via its FiOS fiber optic network. As the world becomes increasingly wired, it’s more important than ever for companies like Verizon to be involved with the operations of businesses and the lives of regular Americans.

This provides a very stable revenue stream that accounts for huge dividends. Like many low-risk dividend stocks, this is a double-edged sword because there might not be any huge growth opportunities for the entrenched telecom. But strong cash flow generation and the lack of any real competition from anyone other than AT&T (NYSE:T[39]) means this telecom stock is a stalwart that’s here to stay.

#1: AT&T

ATTLogo Top 10 Dow Dividend StocksCurrent Dividend Yield: 5%
Performance So Far in 2012:
+22%

One of the biggest stories in 2011, in case you were living under a rock, was that AT&T (NYSE:T[39]) tried to leapfrog rival Verizon (NYSE:VZ[38]) in the wireless market via a buyout of T-Mobile. But regulators ran interference, and AT&T abandoned its bid[40].

Don’t think that means the biggest dividend payer in the Dow Jones Industrial Average should be cut loose from your portfolio, though. With a dividend yield of about 5%, this Dependable Dividend Stock[41] is a heck of an income play. And with a 22% surge in 2012, it’s showing perhaps one of the best investments in 2012 on capital-gains basis alone.

The story is the same for AT&T as Verizon, where a strong balance sheet and its entrenched status are offset by the lack of growth and the highly regulated nature of the telecom sector (case in point: the squashed T-Mobile bid). AT&T admittedly fell short on the top line in its most recent report[42], so there is indeed risk. But it’s not like this company is in any danger of losing its dominance anytime soon.

Admittedly, these U.S. telecoms aren’t “growthy” and won’t deliver massive share appreciation. But if you’re looking for a big dividend payer that will keep throwing off cash for decades, AT&T might be your best bet in the whole Dow Jones Industrial Average.

Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.”[43] Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP. As of this writing, Jeff Reeves did not own a position in any of the aforementioned securities.

Endnotes:
  1. looming “fiscal cliff”: http://investorplace.com/investorpolitics/no-solutions-in-washington-but-no-partial-credit-either/
  2. high unemployment in the U.S.: http://investorplace.com/hot-topics/americas-jobs-challenge/
  3. JPM: http://studio-5.financialcontent.com/investplace/quote?Symbol=JPM
  4. the “London Whale” loss: http://investorplace.com/2012/05/so-jamie-dimon-what-do-you-think-of-the-volcker-rule-now/
  5. shaved $4 billion off earnings: http://investorplace.com/2012/07/jpmorgan-has-a-cold-not-pneumonia/
  6. continued scandal in the financial industry: http://investorplace.com/2012/07/bad-bad-banks-a-spate-of-sinful-behavior/
  7. raise its dividend in March: http://investorplace.com/2012/03/financials-pump-up-payouts-after-stress-test/
  8. C: http://studio-5.financialcontent.com/investplace/quote?Symbol=C
  9. BAC: http://studio-5.financialcontent.com/investplace/quote?Symbol=BAC
  10. GE: http://studio-5.financialcontent.com/investplace/quote?Symbol=GE
  11. a special dividend from GE Capital: http://investorplace.com/2012/05/ge-capital-resumes-ge-dividend-payments/
  12. GE posted mixed earnings in July: http://investorplace.com/2012/07/ge-cites-lost-business-pension-hikes-for-mixed-q2/
  13. getting some of its swagger back: http://investorplace.com/2012/07/ge-is-back-to-firing-on-most-cylinders/
  14. INTC: http://studio-5.financialcontent.com/investplace/quote?Symbol=INTC
  15. gotten the axe from Buffett’s portfolio: http://investorplace.com/2012/08/berkshire-hathaways-holdings-bye-bye-intel/
  16. BRK.B: http://studio-5.financialcontent.com/investplace/quote?Symbol=BRK.B
  17. focusing on mobile semiconductors and Ultrabook sales: http://investorplace.com/2012/08/5-techs-with-tempting-dividends/
  18. PG: http://studio-5.financialcontent.com/investplace/quote?Symbol=PG
  19. 10 dividend stocks left behind in 2012: http://investorplace.com/2012/07/10-dividend-stocks-the-market-left-behind/
  20. Procter & Gamble CEO Bob McDonald: http://investorplace.com/2012/05/can-pgs-ceo-turn-this-story-around/
  21. pretty strong Q4 earnings: http://investorplace.com/2012/08/procter-gamble-tops-q4-profit-forecasts/
  22. DD: http://studio-5.financialcontent.com/investplace/quote?Symbol=DD
  23. sale of its auto paints business: http://investorplace.com/2012/08/carlyle-group-nears-5b-deal-with-dupont/
  24. CG: http://studio-5.financialcontent.com/investplace/quote?Symbol=CG
  25. as InvestorPlace’s Dan Burrows points out: http://investorplace.com/2012/08/5-bargain-busting-blue-chip-buys/
  26. DuPont added another 2 cents to its quarterly payday: http://investorplace.com/2012/04/25-companies-increasing-dividends/
  27. JNJ: http://studio-5.financialcontent.com/investplace/quote?Symbol=JNJ
  28. a new Johnson & Johnson CEO at the helm: http://investorplace.com/2012/02/5-ways-alex-gorsky-can-heal-ailing-jj/
  29. the best stocks in pharma for dividends: http://investorplace.com/2012/08/how-to-pick-the-best-high-yield-stocks-in-big-pharma/
  30. PFE: http://studio-5.financialcontent.com/investplace/quote?Symbol=PFE
  31. best returns in the entire Dow Jones: http://investorplace.com/2012/02/top-10-dow-jones-dividend-stocks-2/2011/12/best-worst-dow-stocks-201/
  32. Pfizer saw a 25% increase in profits: http://investorplace.com/2012/07/pfizer-tops-q3-earnings-estimates/
  33. an IPO for its animal health business: http://investorplace.com/ipo-playbook/pfizer-files-ipo-plan-for-animal-health-business/
  34. has $29 billion in cash: http://investorplace.com/2012/02/top-10-dow-jones-dividend-stocks-2/2011/12/acquisitions-strong-sales-keep-pfizer-dividend-strong/
  35. MRK: http://studio-5.financialcontent.com/investplace/quote?Symbol=MRK
  36. A new osteoporosis drug looks very promising for the drugmaker: http://investorplace.com/2012/07/merck-could-have-a-homerun-in-sight/
  37. Earnings were ho-hum in the latest quarter: http://investorplace.com/2012/07/merck-beats-forecasts-on-lower-earnings/
  38. VZ: http://studio-5.financialcontent.com/investplace/quote?Symbol=VZ
  39. T: http://studio-5.financialcontent.com/investplace/quote?Symbol=T
  40. AT&T abandoned its bid: http://investorplace.com/2012/02/top-10-dow-jones-dividend-stocks-2/2012/01/top-10-dow-jones-dividend-stocks/2011/12/att-t-stock-t-mobile-merger-qualcomm-verizon/
  41. Dependable Dividend Stock: http://investorplace.com/dividend-paying-stocks/
  42. in its most recent report: http://investorplace.com/2012/07/strong-dollar-is-slicing-corporate-sales/
  43. “The Frugal Investor’s Guide to Finding Great Stocks.”: http://www.amazon.com/dp/B007KB9CSI/ref=rdr_kindle_ext_tmb

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