3 Reasons to Pile Into Dow Dividend Stocks

by Marc Bastow | March 13, 2013 11:35 am

Unless you’ve recently set up residence in a cave, you’re well aware that stocks are doing pretty darn good right now. The Dow Jones Industrial Average is in record territory following a seven-day run, while the S&P 500 is floating around 1% to 2% away from its own new all-time high.

What you might not have heard about, though, is that dividend payments from the Dow’s 30 components are closing in on a record of their own.

According to data collected from FactSet Research, dividend payments reached $117 billion, or $347.43 per share, in February — only 7% below the 2007 record[1] of $372.46 per share. The Dow has been rapidly picking up the pace ever since the financial crisis, which caused a dip in the overall tally as companies like General Electric (NYSE:GE[2]) and Bank of America (NYSE:BAC[3]) were forced to reduce or eliminate their dividends.

However, investors are concerned right now about the big run-up possibly putting stocks into dangerous (read: overvalued) territory — and they might end up passing on what are some strong long-term plays, even at current prices.

Here’s why they should be doing the exact opposite and put their money to work in some of the big-time payers of the Dow:

Long-Term Stability

Large helpings of consistent income, over time, helps to cushion investors from some of the inevitable short-term potholes in (what ideally should be) at the very least slow but steady long-term appreciation.

Higher Yield

Of course, there’s income, and then there’s income.

Some investors worried stocks are at their peak might be seeking out the former — the better-of-late-but-still-not-great 2.06% yield on 10-Year Treasuries, the paltry returns from money market funds … even the negative yields[4] from Treasury Inflation Protected Securities, or TIPS.

Dow Jones stocks represent the latter — right now, they average a 2.8% yield, or 74 basis points better than those 10-Year T-Notes. And that’s on average. If you look among the top Dow dividend-paying stocks[5], you’ll find gems like AT&T (NYSE:T[6], 4.9% yield), Verizon (NYSE:VZ[7], 4.3%) and Intel (NASDAQ:INTC[8], 4.18%).

Sure, you can find higher yields in say, junk bonds or other assets, but remember — if you chase yield too high, you’re going to tack on a lot more risk as well[9]. We don’t have to worry about Verizon falling off a cliff.

Room to Run

Those big Dow dividends could get even bigger, too. According to FactSet, the Dow 30 companies have a total of almost $500 billion in cash sitting around and waiting to be put to use. Examples include Microsoft (NASDAQ:MSFT[10], $60 billion), Cisco (NASDAQ:CSCO[11], $47 billion) and Pfizer (NYSE:PFE[12], $34 billion).

Meanwhile, the Dow currently pays out just 32% of its earnings in dividends, which is far under its 50-year historical average payout ratio[13] of just under 50%.

Many of these slower-growth companies need to garner investor interest, and substantial payout increases — while not a lock — seem like a no-brainer.

Marc Bastow is an Assistant Editor at InvestorPlace.com. As of this writing, he was long GE, MSFT, XOM and VZ.

Endnotes:
  1. only 7% below the 2007 record: http://money.cnn.com/2013/03/12/investing/dow-dividends-record/index.html?iid=HP_LN
  2. GE: http://studio-5.financialcontent.com/investplace/quote?Symbol=GE
  3. BAC: http://studio-5.financialcontent.com/investplace/quote?Symbol=BAC
  4. negative yields: http://slant.investorplace.com/2013/02/tips-seem-safe-but-can-destroy-your-nest-egg/
  5. top Dow dividend-paying stocks: http://investorplace.com/2013/02/top-10-dow-dividend-stocks-for-february-2013/
  6. T: http://studio-5.financialcontent.com/investplace/quote?Symbol=T
  7. VZ: http://studio-5.financialcontent.com/investplace/quote?Symbol=VZ
  8. INTC: http://studio-5.financialcontent.com/investplace/quote?Symbol=INTC
  9. you’re going to tack on a lot more risk as well: http://slant.investorplace.com/2013/02/big-yield-can-mean-big-losses-if-youre-not-careful/
  10. MSFT: http://studio-5.financialcontent.com/investplace/quote?Symbol=MSFT
  11. CSCO: http://studio-5.financialcontent.com/investplace/quote?Symbol=CSCO
  12. PFE: http://studio-5.financialcontent.com/investplace/quote?Symbol=PFE
  13. 50-year historical average payout ratio: http://www.philly.com/philly/business/personal_finance/20130312_Your_Money__Higher_dividend_payout_ratio_could_help_propel_market_further.html

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