by Bryan Perry | March 24, 2014 10:35 am
Last week, the Federal Open Market Committee (FOMC) elected to reduce the amount of the Fed’s monthly asset purchases by another $10 billion, down to $55 billion per month. Fed Chair Janet Yellen stated in the post-FOMC press conference that she and the other Fed members see sufficient strength in economy to support further improvement in the labor market.
Fed officials predicted that their target interest rate would be 1% at the end of 2015 and 2.25% a year later. That was higher than was previously forecast, but the upgrade in their projections was based on gains in the labor market, and most FOMC participants restated their view that the Fed will not raise the benchmark interest rate until 2015.
The story going forward will be whether investors trust that the economy can grow organically to maintain equity valuations as the Fed pulls the punch bowl from the market over the next six months. Most would agree that they wouldn’t be tapering prematurely if they weren’t confident that the positive trends are sustainable.
Yellen’s comments caused a brief volatility spike last week, and as the Fed tapers further, it is likely that higher levels of volatility will be brought to the market. That’s why I recommended that investors concentrate on stable, blue-chip dividend stocks with a long history of paying investors solid, dependable dividends.
For solid quarterly income, not to mention the potential for capital appreciation, take a look at the highest-yielding dividend stocks of the Dow Jones Industrials. These well-known, best-of-breed companies can virtually guarantee that their payouts will hit your account each and every pay date.
The top 10 highest-yielding Dow dividend stocks, or “Dogs of the Dow,” pay out sizable yields ranging from 3.17% to 5.40%, and they’re often less susceptible to market downtrends, which makes them ideal holdings when so many investors are confused about future impact of the Fed’s monetary policy on equity markets.
Here are the top 10 Dow dividend stocks by yield for March. (Note: All yields and returns are as of 3/21.)
Dividend Yield: 3.17%
YTD Performance: -6.95%
52-Week Return: -4%
Making our list of dependable dividend stocks for the first time in several months is Coca-Cola (KO). The company owns and markets more than 500 nonalcoholic beverage brands in 200 countries, including four of the top brands in the world: Coke, Diet Coke, Fanta and Sprite.
The largest and most recognizable beverage company on the planet upped its quarterly distribution by 9% to 30.5 cents back in February — its 52nd consecutive annual increase — and the current 3.17% yield is just high enough to beat out Procter & Gamble (PG) for the last spot on our list.
The stock is down almost 7% year-to-date, which has also affected its yield, but capital appreciation is not the draw of KO stock. The stock has been climbing slowly but surely over the last several years and has rewarded patient investors who have held this blue chip for its steady payouts.
However, Coca-Cola will have an opportunity to reverse its recent slide as the global economic recovery continues. Strengthening emerging markets will increase the number of consumers from which KO can generate revenue, and that should ultimately boost free cash flow and further distributions.
Dividend Yield: 3.22%
YTD Performance: +9.21%
52-Week Return: +23.97%
While some of the dividend stocks on our list have been flat or worse over the first three months of the year, Merck (MRK), the global provider of health care products and services, has seen its shares increase by almost 10%. Even with the relatively big run up in the stock price, Merck still sports a decent 3.22% dividend yield.
MRK missed EPS estimates in its last earnings report, but the Street seemed to be more focused on its promising new drug pipeline and continued to push the stock higher. Investors were also excited to hear that Merck will be making an effort to make its business more efficient by selling off its consumer brands division, which some analysts believe could bring in as much as $11 billion.
MRK is currently developing a new cancer drug, as well as many others for a number of different applications, and any positive developments in clinical trials could send the stock higher in the near term. For the long-term investor, MRK stock trades at a moderate forward P/E ratio of 14.6 compared to the S&P average of 16, and you can count on increased distributions from the big-pharma giant as it streamlines its business further.
Dividend Yield: 3.23%
YTD Performance: +5.06%
52-Week Return: +14.85%
Pfizer (PFE) has once again taken the No. 8 spot in our latest installment of the top Dow dividend stocks. With a market capitalization of more than $200 billion, PFE is the world’s biggest pharmaceutical company, earning approximately 90% of its revenues from the sale of its prescription drugs, such as Viagra and Lyrica.
PFE did lose its patent for the popular cholesterol medication Lipitor, but it is currently in the process of commercializing an over-the-counter version of the drug, and the company has been able to make up for any losses by increasing sales of their current stable of drugs. Also, shares have been buoyed by better-than-expected data from a new study of their pneumonia vaccine, as well as a new cardiovascular medication called Eliquis.
Despite the loss of exclusivity rights for the major drug, PFE is still projecting sales to be upwards of $50 billion in 2014 on the high end of the range. The company continues to show strong growth prospects, and with its latest 8.3% distribution increase to 26 cents per share per quarter, owners of the stock are looking at a $1.04 annual payout going forward.
Dividend Yield: 3.39%
YTD Performance: -1.61%
52-Week Return: -4.21%
McDonald’s (MCD) has struggled to gain momentum in 2014, even as competitors Burger King (BKW), Wendy’s (WEN) and Chipotle Mexican Grill (CMG) have all made year-to-date gains. Part of the reason it has lagged behind is that comparable-store sales have been on the decline.
Earlier in March, MCD reported that domestic comp sales fell by 1.4%, while overall comp sales fell by just 0.3% thanks to slightly better results in foreign markets. However, the iconic fast food chain got a bit of a break when company CFO Pete Bensen announced that MCD would be taking further steps to return more cash to its shareholders.
Over the past three years, the company has been increasing its dividend steadily and has returned more than $16 billion to its investors through both dividends and share buybacks. Additionally, MCD has been testing a new breakfast lineup that should give it a competitive edge against companies like Starbucks (SBUX) and Dunkin Brands (DNKN) — both of which pay measly dividends of less than 2%.
Therein lies the advantage to owning MCD over its rivals — its 3.4% yield. If MCD is able to increase its market share in the breakfast space, the additional revenue could be used to fund greater cash distributions in coming quarters.
Dividend Yield: 3.46%
YTD Performance: -7.43%
52-Week Return: -3.38%
Falling one spot from last month’s list of dividend stocks, Chevron (CVX) is one of the largest and most well-known integrated energy companies on the planet. Although the company recently reduced its production volume guidance by about 6% for 2017 — which was due in part to an expected decrease in oil demand, liquefied natural gas prices and asset sales, among other factors — its overall production growth is still better than many of its energy-sector peers.
In fact, CVX was the only company of its kind to forecast growth in 2014. Contributing to the growth will be an 8.6% increase in drilling in the U.S. Permian Basin region (production in the region is expected to double over the course of the decade), as well as higher production from its Texas-New Mexico project.
Even with strong growth prospects, CVX still trades at a discount relative to other energy stocks. With a forward P/E ratio of 9.4 (compared to Exxon‘s (XOM) 12.3), its valuation is very enticing. CVX should continue to outperform the rest of the stocks in the sector as oil prices remain above $100 per barrel for the foreseeable future, and as revenues increase, the company will be able to afford to pay out more to investors.
CVX has a current payout ratio of about 35%, and that is expected to increase to approximately 38% later this year, keeping with the company’s tradition of consecutive dividend increases during the past five years.
Dividend Yield: 3.48%
YTD Performance: -9.38%
52-Week Return: +8.36%
General Electric (GE) cut its dividend to just 10 cents back in 2009 when the financial crisis was at its peak. So how did GE manage to make it onto our list of Dow dividend stocks?
Well, ever since bottoming out below the $10 mark, the General has increased its dividend by a massive 120% to a current quarterly payout of 22 cents per share. That might not sound like a lot, but with the stock trading at approximately $25.50, that 22 cents makes for 3.5% dividend yield.
Among other reasons, that dividend increase is also why GE has seen a huge run up in its stock over the last five years. The titan of industry has been steadily regaining investors’ trust through increased distributions, and if you happened to buy the shares when they bottomed out around $7, you’d be sitting on a triple-digit total return, which includes $2.86 in dividend income per share.
Last month, news broke that legendary investor Warren Buffett had acquired a massive position in GE to the tune of about $300 million, or approximately 10 million shares. Buffett’s track record, not to mention the sheer size of his position, should be a positive indication about where the stock is headed. Additionally, GE CEO Jeffrey Immelt just recently used his cash bonus to purchase $2.6 million worth of his company’s stock.
If GE’s handsome dividend yield of 3.5% didn’t grab your attention, these two huge endorsements by some of the biggest names in business should certainly have you considering GE as part of your long-term portfolio.
Dividend Yield: 3.51%
YTD Performance: -3.52%
52-Week Return: +4.3%
Cisco Systems (CSCO) has ascended on our list of dividend stocks for March, and it is now the fourth highest-yielding stock in the Dow. Its yield has increased slightly from the previous 3.43% to the current 3.51% thanks to a recent bump in the quarterly payout and a slight drop in the share price from last month.
In fact, CSCO is down about 4% since it announced it would be raising its dividend for the quarter by 12%. The current quarterly payout stands at 19 cents per share, up from the 17 cents per share that was paid to shareholders over the previous four quarters.
Cisco continues to underperform the S&P 500 (CSCO has lost about 1.3% for the year, while the S&P has now gained 1%), but at these levels, the stock looks quite good. With a P/E ratio of just 14.4, CSCO seems to be fairly valued, especially when we consider that the industry average is a whopping 44.4. At current levels, CSCO should be seen as an attractive holding for long-term investors looking to take home an annual dividend of 76 cents per share.
Dividend Yield: 3.58%
YTD Performance: -3.02%
52-Week Return: +17.75%
Intel (INTC) kicks off our top 3 dividend stocks again this month as one of the most recognizable names in the chipset industry. The company designs and manufactures computer processors and chips for use in products ranging from personal computers, phones, tablets and even medical devices.
Just last week, the company announced another quarterly dividend payout of 22.5 per share, which puts INTC’s yield right at 3.58%. However, echoes of the “PC is dead” crowd can still be heard, and as more consumers move from desktops to mobile devices, INTC has been forced to find other ways of increasing revenue.
When the company’s current CEO, Brian Krzanich, was appointed to the position in mid-2013, he stated that one of his main goals would be to broaden the reach of INTC’s chips into “more novel fields” such as wearable technology. As more of the devices we use every day become smarter and more highly connected to one another, they will require INTC’s chips and technology.
The “Internet of Things” is the term that was coined to describe the phenomenon of the increasing connection between technology and the ordinary items we used in our everyday lives. While fully-functional smart cars and smart houses are still a ways away from reality, analysts estimate that the Internet of Things could be worth $300 billion in just six years.
INTC is currently fighting to get a piece of that revenue, and when they do, you’ll feel even better about owning a stock that’s already paying you a yearly dividend of 90 cents per share.
Dividend Yield: 4.52%
YTD Performance: -4.54%
52-Week Return: -4.31%
Once again, Verizon (VZ) has taken the second place spot on our list of top Dow dividend stocks. Although its dividend yield is not as high as that of AT&T (T), VZ has almost doubled the performance of its biggest competitor in terms of capital appreciation over the last five years (60% versus 34% for T stock).
One reason for that performance is that the company has been able to steadily grow its wireless business. Verizon Wireless, which is now owned in full by parent Verizon Communications after it acquired Vodafone’s (VOD) 45% stake in a deal worth approximately $130 billion last month, outpaced the revenue growth of AT&T’s wireless segment in the latest quarter.
It has been estimated that the acquisition could help to increase VZ’s future earnings by about 10%, which in turn could boost the company’s payout ratio. The current quarterly dividend sits at 53 cents per share, requiring VZ to pay out $1.48 billion to shareholders, but with average quarterly free cash flow coming in at more than $3.8 billion, the company has more than enough to cover an increased payout.
VZ has upped its dividend by about 1.4% annually over the last five years, but as earnings increase, dividend payouts should get a boost as well. Trading about 13.5% below its 52-week high of $54.31, VZ carries a P/E ratio of 11.6 — an enticing number to value investors looking to add this high-yielder to their portfolios.
Dividend Yield: 5.36%
YTD Performance: -2.45%
52-Week Return: -5.85%
AT&T (T) is the biggest telecommunications provider in the United States, with a market cap of $177 billion, but it differs from some other dividend stocks in that it combines great fundamentals with the potential for significant capital appreciation.
After falling by 3.5% year-to-date, T carries a P/E ratio of 9.7, which is significantly lower than the 19.5 industry average. The stock currently trades at the $34 level — about 13% lower than the $38 high it made in 2013 — and that difference has shares looking extremely attractive, even to the company’s CEO.
Earlier in the month, AT&T CEO Randall Stephenson spoke at Morgan Stanley’s Technology, Media & Telecom Conference. Although he noted that the company’s share buybacks will be “dialed back” in 2014, he also stated that T will “be in the market buying the stock at $32 [per] share. We like the stock a lot.”
As volatility in the broad market becomes more apparent, expect bargain buyers looking for stable holdings to come into the stock. After raising the dividend per share from 45 cents to 46 cents in early 2014, T delivers a fat $1.84 annual payout, or a 5.36% yield at current levels. The company has increased its quarterly payout every year since 2008, and that should present investors with an ideal place to park their money and earn steady income at the same time.
Bryan Perry is the editor of Cash Machine, a newsletter focused on high-yield income investing with the goal of maintaining a blended total yield of 10% across two portfolios. Bryan is also the editor of Extreme Income, which uses the power of historically cheap money to create a leveraged “baby hedge fund” strategy that paves the way to massive profits and 4x greater income.
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