by Bryan Perry | April 29, 2014 12:23 pm
Sixteen weeks into 2014, the Dow, Nasdaq and Russell 2000 are all down year-to-date, while the S&P 500 is only ahead by about 1.5%. The market is dealing with some genuine obstacles that weren’t prevalent at the end of 2013, as worries over Russia’s annexation of Ukraine, slowing in China’s economy, Japan’s anemic exports, deflationary pressure in Europe and Fed tapering are weighing on investor sentiment.
If these issues weren’t enough, the “great rotation” out of the New America stocks — Facebook (NASDAQ:FB), Netflix (NASDAQ:NFLX), Amazon (NASDAQ:AMZN), Priceline (NASDAQ:PCLN), Tesla (NASDAQ:TSLA), 3D Systems (NASDAQ:DDD), Twitter (NYSE:TWTR), Yelp (NYSE:YELP) and too many biotech stocks to list — sent shivers through the market that are just now starting to abate. The mid-April rebound saw the bloodletting in high-beta stocks somewhat cease, while capital flows into dividend-paying stocks and high-yield assets remained strong.
Corrections come when markets least expect them, and high-valuation stocks have clearly undergone a fierce re-pricing of what investors believe to be growth at a reasonable price. So utilities, defensive blue-chip stocks and high-yield assets have been the tortoises that are winning the year-to-date race so far amid little fanfare. As such, it’s a great time to consider taking a stake in the highest-yielding dividend stocks of the Dow Jones Industrials. These well-known, best-of-breed companies have a long history of solid, dependable dividends.
These top 10 highest-yielding Dow dividend stocks, or “Dogs of the Dow,” pay out sizable yields ranging from 3.10% to 5.25%, and they’re often less susceptible to market downtrends, which makes them ideal holdings when so many traders are confused about which sectors of the market can still produce a return on investment.
Here are the top 10 Dow dividend stocks by yield for April. (Note: All yields and returns are as of 4/28.)
Dividend Yield: 3.10%
YTD Performance: +1.88%
52-Week Return: +7.57%
Procter & Gamble (NYSE:PG) beat earnings-per-share estimates when it announced its third-quarter results last week, but the rest of the report was essentially in line with analysts’ expectations. The EPS reading marked an increase of about 5% from a year earlier, and organic sales rose by 3%, but revenue and gross profits both fell year-over-year. The stock gapped lower on its report day, but has since made up all of the losses and now trades just under the $83 level.
There are a number of other reasons why PG made it back onto our list in April after being knocked off by Coca-Cola (NYSE:KO) last month. First, the company increased its cash dividend from 60.15 cents to 64.36 cents for the current quarter — an increase of 7%, which makes for a current dividend yield of 3.1%.
Second, the company only pays out about 65% of its earnings to shareholders, so there is the chance that its $2.57 annual dividend could be increased in the future. Finally, PG maintains a 57-year track record of dividend increases, which qualifies the stock as one of the S&P 500’s Dividend Aristocrats.
The company’s CEO also remains committed to keeping investors happy with steady quarterly distributions, and will continue to implement cost-cutting measures that should save billions of dollars over the next several years.
Dividend Yield: 3.11%
YTD Performance: +13.25%
52-Week Return: +18.40%
Merck (NYSE:MRK), the $167 billion global provider of health care products and services, leads our list of Dow dividend stocks in capital appreciation in 2014. However, even after gaining more than 13% this year, MRK still offers a 3.22% dividend yield.
The run-up in the share price can also be seen in its 38.9 P/E ratio, which is higher than most of its peers. Still, MRK’s new immuno-oncology drug and foray into the Hepatitis C treatment area represent a promising pipeline that could reward long-term investors.
Merck is scheduled to report first-quarter earnings on April 29, and analysts are looking for EPS of 79 cents on revenue of $10.44 billion, both of which are lower than the levels reported a year ago. Part of the reason for the Street’s lowered expectations is that generic competition may be cutting into MRK’s top line, though a strong showing from several other segments of its business could help the stock when the numbers are released.
Dividend Yield: 3.18%
YTD Performance: +0.66%
52-Week Return: +4.74%
Chevron (NYSE:CVX) is one of the largest and most well-known integrated energy companies on the planet and boasts a record of consecutive dividend increases over the last 25 years. On top of the dividend, the biggest factor that makes CVX a smart investment at this time is its future growth prospects.
The company expects to increase its capacity by 20% over the next four years, and while it has been primarily centered on exploring for and producing oil, it’s now branching out into the natural gas space and is either involved in or planning liquefied natural gas drilling operations outside of the U.S. in places like China and Australia. CVX also plans to increase revenues by drilling in the U.S. Permian Basin region (production in the region is expected to double over the course of the decade) and through its Texas-New Mexico project.
Even with such strong growth prospects, CVX trades with a reasonable valuation compared to other energy stocks. With a P/E ratio of 11.2 — compared to Exxon’s (NYSE:XOM) 13.6, its valuation is very enticing. CVX also bests XOM in earnings growth, profitability and dividend growth and dividend yield, which are the metrics that investors will consider when determining which stock is the better buy.
As other countries warm up to the idea of hydraulic fracturing and natural gas in general, Chevron is prepared to move in and accelerate the process, and you should be prepared to profit from the natural gas revolution as well.
Dividend Yield: 3.23%
YTD Performance: +3.38%
52-Week Return: -0.57%
McDonald’s (NYSE:MCD) certainly struggled over the last year, but the stock has actually come into favor in the last few months as capital rotates into names that trade at low valuations. MCD carries a P/E ratio of 18.1 compared to the 28.1 industry average, and investors have taken notice.
MCD reported earnings last week with mixed results. First-quarter revenue came in as expected, at $6.7 billion, but the company missed EPS estimates of $1.24 by three cents. While McDonald’s leads its peers in terms of revenue, its long-term growth prospects lag significantly against Burger King (NYSE:BKW) and Chipotle (NYSE:CMG).
The company is also experiencing pressure from competitor and owner of Taco Bell, Yum Brands (NYSE:YUM), which is trying to lure in more customers with its new “Waffle Taco.” Approximately 25% of MCD’s sales derive from its breakfast menu, a number that YUM is actively trying to decrease.
It’s unlikely that MCD will see the same kinds of growth rates as its newer rivals, but you can earn a solid 3.23% yield from this fairly valued, blue-chip dividend stock if your portfolio can stomach the recent setbacks.
Dividend Yield: 3.25%
YTD Performance: +4.60%
52-Week Return: +6.48%
Pfizer (NYSE:PFE), the world’s biggest pharmaceutical company with a market capitalization of almost $205 billion, has moved up two spots since our last edition of the top Dow dividend stocks.
PFE has garnered a lot of attention from the investment community lately after proposing a $100 billion dollar takeover of London-based biopharmaceutical company AstraZeneca PLC (NYSE:AZN). AZN rejected the offer at first, but PFE is still in pursuit of a deal. If completed, it would be the largest takeover of its kind in history.
The takeover would be advantageous to PFE for several reasons. The company would be able to significantly increase its product line in the areas of oncology and diabetes treatment, and it would also benefit via the distribution channels that AZN already has set up overseas.
Perhaps even more compelling for Pfizer, the proposed deal would enable PFE to put use the approximately $70 billion in overseas cash that would otherwise be subject to exorbitant corporate taxes if it was returned to the United States. Incorporating in the U.K. would ultimately lead to a more competitive tax rate for PFE, even if the company keeps in headquarters in the U.S.
PFE is up about 4.6% for the year to the $32 level, and just last week declared another dividend payout of 26 cents for the current quarter. That makes for an attractive dividend yield of 3.25% on a stock that trades with a P/E ratio of 18.6, which is right in line with its industry peers.
Dividend Yield: 3.29%
YTD Performance: -4.46%
52-Week Return: +20.58%
General Electric (NYSE:GE) is down almost 5% in 2014, but that doesn’t tell the whole story. Since hitting a low near the $24 level back in February, the stock has rallied approximately 6.6% as the rotation into blue-chip names with yield has gained strength.
Earlier in April, GE reported its first-quarter results, in which the company posted disappointing revenue that declined 2% to $34.2 billion and net income that fell 15% to $3 billion. That sounds negative on the surface, but there were several positive factors that pushed the stock over $26.50 on its report day.
First, GE’s industrial profit and revenue grew 12% and 8%, respectively. Its oil and gas segment enjoyed a 37% increase in profit, and its aviation unit boosted profits by 19% to $1.1 billion thanks to increased engine demand.
Investors often look to GE to provide some insight into the state of the underlying economy, and the numbers are indicating that the U.S. may be in for a slow-but-steady 2014 in terms of economic growth. At the same time, GE has steadily increased its dividend over the past five years, and now pays out more than twice what it did back in 2009. With a handsome 3.3% dividend yield, GE will pay you 88 cents per year while you wait for the economy to pick up speed.
Dividend Yield: 3.30%
YTD Performance: +2.63%
52-Week Return: +11.37%
Cisco Systems (NASDAQ:CSCO), the information technology and Internet protocol giant, is up about 7% from its recent bottom in March, and its latest cash dividend of 19 cents per share for the current quarter represented an increase of 11.8% from the previous 17 cents-per-share dividend.
CSCO endured some setbacks after posting less-than-stellar results and unimpressive forecasts, but is now making plans to transition its core business in order to move into more profitable endeavors. For example, the company is planning to make a switch from its traditional hardware-based model to one that focuses on the growing areas of cloud computing, mobility, security and the Internet of everything (the term used to describe the phenomenon of the increasing connection between technology and the ordinary items we used in our everyday lives).
The company is in the beginning stages of its transition, which presents investors with the opportunity to take advantage of this long-term growth story in the early going. With a P/E ratio of just 15.2, CSCO trades at a great bargain against its peer group, which carries a P/E ratio of 33.8, and the company is ready to reward patient investors with an annual dividend of 76 cents per share.
Dividend Yield: 3.42%
YTD Performance: +1.44%
52-Week Return: +12.52%
Intel (NASDAQ:INTC), which designs and manufactures computer processors and chips for personal electronic devices such as computers, phones, tablets and medical devices, has maintained the No. 3 spot on our list of dividend stocks again in April.
Earlier this month, the company announced its first-quarter earnings, including EPS that beat estimates by a penny. Although it beat the Street, the EPS reading of 38 cents per share was 5% lower than it was a year earlier. Net income came in at just $1.9 billion, which was also down 5% from the previous year.
Positive highlights include a 1% year-over-year increase in PC Client Group revenue, and an 11% year-over-year increase in revenue from its Data Center Group. INTC reported overall revenue of $12.8 billion for the quarter, and returned $1.1 billion to shareholders in the form of dividends.
The company declared another 22.5-cent quarterly dividend payout in March, which equates to a current dividend yield of 3.42%. Furthermore, the stock trades with a P/E ratio of just 13.9 versus the industry average of 22.7, which should make this a go-to name in the current value-investing landscape.
Dividend Yield: 4.55%
YTD Performance: -5.17%
52-Week Return: -13.11%
Shares of Verizon (NYSE:VZ) have struggled recently, but the company continues to pay out a hefty quarterly dividend of 53 cents, keeping VZ firmly in the second-place spot in the list of highest-yielding Dow dividend stocks. Corrections come and go, but Verizon has been steadily growing its annual payout for the last seven years, and the company has made some key moves lately that should grab investors’ attention.
About a month after completing the deal to retake Vodafone’s (NASDAQ:VOD) stake in Verizon Wireless, for which the company raised a record-high $49 billion in bonds, Verizon announced a debt offer to raise another $4.5 billion, which it intends to use to repurchase five tranches of company debt. Like the Vodafone deal, this move should help boost Verizon’s bottom line. And in fact, EPS did enjoy a year-over-year gain in the first quarter, from 68 cents to 84 cents in non-GAAP earnings. VZ stock took a hit on that news, though, because analysts’ consensus forecast was for EPS of 87 cents.
However, a closer look at the earnings release reveals some good news for Verizon Wireless. Service revenues gained 7.5% year-over-year for the wireless segment, and since the buyback deal with Vodafone just closed on Feb. 21, that figure only includes five weeks’ worth of full results.
The company’s wireless segment gained 539,000 net retail postpaid customers for the quarter. Interestingly, the increase came not from cell phone customers, but from tablet users and even home phone users. As Verizon works on upgrading its landline network, more and more home phones are now connecting to the wireless network, which may account for the decrease in landline users. It’s a brave new world for telecom, and investors who buy VZ now can benefit from the continued shift while earning a steady 4.55% on their money.
Dividend Yield: 5.25%
YTD Performance: -0.23%
52-Week Return: -5.29%
Rival wireless providers like T-Mobile (NYSE:TMUS) might be trying to elbow in on its market share, but AT&T (NYSE:T) is still the biggest telecommunications provider in the United States. It also has strong fundamentals, contrary to what investors may expect of a stock with such a high yield.
On April 22, AT&T released its first-quarter earnings report, which showed a 10.9% increase in earnings per share (EPS) over the same quarter a year earlier, from 64 cents to 71 cents, beating the Street’s expectations by a penny. What’s more, the company took a big step towards closing the gap between its customer base and that of Verizon. In the first quarter, AT&T added 625,000 postpaid customers, noting that these were the “best first-quarter net adds in five years.”
Unfortunately, none of this kept the shares from suffering a 3.4% selloff the following morning. The sticking point seemed to be forward guidance: Analysts had anticipated an 8% earnings-growth forecast, but AT&T’s actual forecast was for 4% or greater.
The company did maintain the same hefty payout of 46 cents as in the prior quarter, however, so income investors should consider using the dip as an opportunity to buy the highest-yielding Dow dividend stock at a discount and take advantage of the 5.25% current yield.
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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