The Dow Jones Industrial Average, while maybe not as relevant a gauge of the American economy as it once was, is still one of the most-followed indices in U.S. markets thanks to its makeup of solid, dependable blue chips.
It’s also pretty popular among income investors.
After all, nearly half the index yields more than 3% in dividends and the group as a whole yields 2.5% via the SPDR Dow Jones Industrial Average ETF (NYSE:DIA). That’s not too shabby considering the relatively chinsy 1.8% you’re getting from a 10-year Treasury or this laughable “top national CD account rate” of 1.19% — neither of which would even keep up with the current “low” 2% rate of inflation.
Sadly, they can’t all be winners. While we regularly love to laud the Dow Jones’ most generous stocks, a number of components aren’t holding their own on the dividend side of things. Some are just hugging onto cash for dear life, paying out far less as a percentage of earnings than the current 34% average across the S&P 500 or the 52% historic average. Others just are flopping so hard on the business side that they can’t afford to shell out any more each quarter.
That isn’t to say these Dow dividend losers are bad stocks overall … in fact, a number of them have been carrying the index with outsized returns. But if you’re an investor who puts income above all else, consider these stocks off-limits until they can up the dividend ante.
#7: Home Depot
Dividend Yield: 1.9%
Payout Ratio: 40%
YTD Performance: +44% vs. +7% for the Dow Jones Industrial Average
No one’s kicking Home Depot (NYSE:HD) out of bed for eating crackers this year. The nation’s largest home-improvement retailer has blown the cover off 2012 with 46% returns year-to-date, well outperforming the also-strong 28% gains of little brother Lowe’s (NYSE:LOW).
HD’s hot run was partially fueled by a standout second quarter in which the company saw significant improvements in earnings and same-store sales. Plus, HD now expects to report higher profits for the full fiscal year.
At less than 2%, Home Depot’s dividend isn’t anything to scream about on a yield basis. But in HD’s defense, the company has been making quarterly payouts for 25 years, and last year’s dividend increase was the company’s biggest hike since 2006. HD also is the only stock on this list with a higher-than-average payout ratio (40% on projected FY2013 earnings), but it’s not so bloated as to make future increases unlikely.
Home Depot reports third-quarter earnings Nov. 13.
Dividend Yield: 1.8%
Payout Ratio: 23%
YTD Performance: +4%
When we last slapped International Business Machines (NYSE:IBM) on the wrist in March, we were in the midst of an incredible run in IBM that saw shares up roughly 140% in about three years, so Big Blue got a pass.
Since then, however, IBM has been on a roller-coaster ride that saw shares drop from $210 in early April to around $180 in July, back to all-time highs at $211 just a week ago … until earnings came around.
IBM’s revenues slumped amid a weak global economy that has companies kicking tech purchases and IT services down the road — a broader theme that is being played out across the sector. Shares have fallen nearly 10% since then, and are up only 4% since January.
Considering IBM has merely confirmed guidance for the year, the growth prospects don’t look good. All of a sudden, IBM’s paltry yield — just 1.8%, representing just 23% of the company’s earnings — sticks out like a sore thumb. Maybe rather than betting the farm on share buybacks, IBM should consider spending some of its $12 billion-plus in cash and short-term equivalents on suddenly disappointed investors.
#5: UnitedHealth Group
Dividend Yield: 1.5%
Payout Ratio: 14%
YTD Performance: +11%
Welcome to the Dow, UnitedHealth!
Now, where the heck is our money?
That’s right. Just more than a month ago, UnitedHealth Group (NYSE:UNH) became the lone health insurance component of the Dow Jones Industrial Average — replacing the now split-apart Kraft — and it immediately settled in with the bad crowd. UNH sports one of the worst dividends in the index, and its miserly payout ratio would make Scrooge McDuck blush.
Don’t hate on UnitedHealth too much, though.
It only recently got into the business of frequent payouts, switching from a 3-cent annual dividend to quarterly distributions in 2010, which should end up totaling 79 cents by year’s end. In just a scant three years, UNH has boosted its payout more than 60% — not bad.
Also, you have to love that UnitedHealth is playing in as hopeful a sector as healthcare, which should benefit from demographic trends playing out both in the U.S. and abroad.
So UNH definitely looks like a defensive investment for the long run; investors just have to hope dividend growth will come with time.
#4: American Express
Dividend Yield: 1.5%
Payout Ratio: 17%
YTD Performance: +17%
Here are a couple fun facts for you concerning American Express (NYSE:AXP):
- AXP shares vaulted into a rebound after the financial crisis, turning out 350% returns since its 2009 lows.
- In that time, AXP has increased its dividend roughly 11% — from 18 cents quarterly to 20 cents.
Granted, dividends and share appreciation don’t go hand in hand, and the Fed actually had to sign off on AXP’s dividend increase this year.
It has been a fantastic year for financial companies, as evidenced by the likes of Bank of America (NYSE:BAC, +65%) and Citigroup (NYSE:C, +40%). In fact, it has been a fantastic year for financial companies in the credit-card business, including Discover Financial Services (NYSE:DFS, +66%) and Capital One (NYSE:COF, +42%).
American Express admittedly has more than held in its own in the Dow with 17% returns, but as profits continue to improve — though slower than expected in Q3 — AXP’s payout ratio continues to remain slim and the yield remains wanting.
Dividend Yield: 1.3%
Payout Ratio: N/A
YTD Performance: Flat
The woes of aluminum giant Alcoa (NYSE:AA) are pretty well documented, though — God love ‘im — InvestorPlace Editor Jeff Reeves still remains faithful to his 10 Best Stocks for 2012 pick.
Alcoa is off 50% from 2011 pricing and 75% in the past five years amid a slow, steady drumbeat of declining demand and soft prices … making its flat year-to-date performance a surprising silver lining.
AA shares paid 17 cents quarterly starting in January 2007, but its shares tanked and in March 2009 it shaved its payout to 3 cents. If that figure sounds familiar, that’s because it’s what AA is currently paying.
Also, take a gander at the company’s payout ratio — or lack thereof. See, you can’t figure out the percentage of earnings paid as dividends without actual earnings. And AA lost 13 cents a share including charges in the most recent quarter.
Translation: Don’t expect that dividend to improve anytime soon.
#2: Walt Disney
Dividend Yield: 1.2%
Payout Ratio: 20%
YTD Performance: +33%
Walt Disney (NYSE:DIS) might be responsible for the happiest place on Earth, but the stock is a factory of dividend sadness.
2012 has been pretty kind to a number of travel and tourism-related stocks, such as Carnival (NYSE:CCL) and Six Flags (NYSE:SIX). Not to mention, it’s been a decent year for media stocks like CBS (NYSE:CBS) and Viacom (NASDAQ:VIAB).
Disney is both those things, plus so much more — and has nearly quintupled the returns of the Dow Jones. DIS set all-time highs earlier in October, and even after cooling off, shares still are up a whopping 33% year-to-date. Some of that run was powered by record quarterly earnings reported this summer.
And yet, despite all that, shareholders are seeing a meager 1.2% in dividends. What gives?
Well, Disney did improve its annual payout 50% at the end of last year, from 40 cents to 60 cents, and the end of this year isn’t too far away. Investors can go ahead and be optimistic about an increase to the payout, but even another 50% jack wouldn’t vault Disney out of the bottom five-yielding Dow stocks.
Walt Disney reports earnings after the bell Nov. 8.
#1: Bank of America
Dividend Yield: 0.4%
Payout Ratio: 10%
YTD Performance: +65%
Bank of America was turned down in 2011 when it asked the Federal Reserve for permission to increase its dividend, so it didn’t even bother earlier this year following a round of bank “stress tests.”
BAC’s 1-cent quarterly payout actually represents 400% of its 2011 earnings, so it seems difficult to gripe about the lack of any recent increase. But despite a breakeven third quarter, 2012 earnings are expected to be around 41 cents per share, putting that payout ratio closer to 10%.
Current shareholders might be a little slow to complain, considering that BAC is on pace to finish as the Dow’s best-performing stock of the year at 65% gains for the year-to-date. But considering that run has come amid generous reports with easy year-over-year comparisons, it’s worth wondering whether Bank of America can keep it up.
And with a dividend yield wholly to the right side of the decimal point, income investors have absolutely no reason to wait around and find out.
Kyle Woodley is the Assistant Editor of InvestorPlace.com. As of this writing, he did not hold a position in any of the aforementioned securities. Follow him on Twitter at @KyleWoodley.