Top 10 Dow Dividend Stocks

Roll of MoneyWell, once again we enter the summer months with the market roiling with volatility and fears of a sovereign debt catastrophe. The red-hot financial sector has crashed back to earth, tech stocks are rotating out of favor and defense is the new offense.

Many conservative, long-term investors know the most stable stocks on Wall Street tend to be big blue chips with massive brand recognition and a hefty dividend yield. While there are a lot of sexy names getting press right now — like Facebook (NASDAQ:FB) and its massive IPO on May 18 — there is nothing wrong with a slow trickle of income and a stable blue-chip company that will ride out any rough going this summer.

It’s the classic tortoise vs. the hare scenario. You can flail around banking on sector rotation or a rebound in gold or the next high-growth small-cap stock that will deliver big gains before flaming out — or, you can steadily grow your retirement funds in tortoise-like blue chips that plod along slowly and safely retreat into their shell when times are tough.

If you’re looking for a “tenbagger” or overhyped penny stocks, this list is not for you. But if you believe income is important and that slow and steady wins the race, here are the top 10 dividend stocks in the Dow Jones Industrial Average, ranked by yield:

#10: JPMorgan Chase

JPMorgan NYSE:JPMCurrent Dividend Yield: 3.4%
Performance So Far in 2012: +7%

JPMorgan Chase (NYSE:JPM) has been making a lot of headlines lately — for all the wrong reasons. A little something about a $2 billion JPM trading loss, which you might have heard …

Yes, the the ugly incident has damaged the reputation of CEO Jamie Dimon. Yes, the $2 billion JPMorgan loss is fueling supporters of the Volcker Rule and other regulations limiting speculative investments at banks. But the stock still is up handily year-to-date (more than double the Dow’s 3% gains), boasts a great yield and is the largest American bank by assets.

On the yield side, JPM was granted Federal Reserve permission to raise its dividend in March, even as competitors like Citigroup (NYSE:C) and Bank of America (NYSE:BAC) have failed to improve their payouts beyond a nominal penny per quarter in dividends. You can bet that Ben Bernanke and others at the Fed wouldn’t have allowed JPM to boost its payout if it wasn’t sustainable.

If you’re a long-term investor, you might want to take advantage of the recent turmoil in JPMorgan Chase to get into a nice dividend stock at a decent price.

#9: DuPont

Dupont (NYSE:DD)Current Dividend Yield: 3.5%
Performance So Far in 2012: +9%

Next on this list of Dow dividend stocks, based on yield, is E.I. du Pont de Nemours & Company (NYSE:DD), a.k.a. DuPont.

DuPont investors know that while this chemicals stock isn’t grabbing as many headlines as Silicon Valley tech shops, this sleepy giant is turning around and doing right by shareholders. DD stock lagged the market in 2011 with an 8% decline but has topped the market three times over in 2012.

Revenue is up year-over-year for 10 straight consecutive quarters after strong earnings in April, and DuPont’s EPS have gone from $1.92 for fiscal 2009 to an impressive $3.68 in fiscal 2011 — almost double — and are forecast to jump another 15% in fiscal 2012.

Dividend investors in it for the long term know the staying power of DuPont. The company has paid dividends for more than 100 years and is a stable industrial giant that isn’t going anywhere. At the end of April after DuPont’s earnings, it added another 2 cents to its quarterly payday, too, proving this industrial company is not just preserving dividends — but improving them.

#8: Procter & Gamble

Procter & Gamble (NYSE:PG)Current Dividend Yield: 3.5%
Performance So Far in 2012: -3%

Procter & Gamble (NYSE:PG) hasn’t been very pleasing to shareholders so far in 2012. Yes, the yield is nice — but the stock has sat out the market’s recent rally, and at the end of April, P&G earnings showed a disappointing outlook for the rest of the year. Shares of Procter & Gamble have struggled recently in the face of those results and general market headwinds.

But Procter & Gamble CEO Bob McDonald is looking overseas to prop up the balance sheet amid rising commodity costs, frugal U.S. consumers and performance that lags rivals like Colgate-Palmolive (NYSE:CL). 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, and that is a concern. But you can’t get more defensive than consumer staples, so dividend investors wary of a summer downturn might want to turn to Procter & Gamble if they are planning on staying fully invested in the stock market right now.

#7 Chevron

Chevron Corp. (NYSE:CVX)Current Dividend Yield: 3.6%
Performance So Far in 2012: -6%

Crude oil has rolled back slightly from its 2012 high of around $111 a barrel, back into the low $90s as of this writing. So it’s no surprise that amid weaker prices and pretty flat demand, Chevron (NYSE:CVX) hasn’t done well lately. CVX stock actually is in the red in 2012 vs. gains for the broader market. Recent oil stock earnings show that refining continues to be a bit of a drag in the short term for Chevron and other oil majors.

But on the income side, Chevron has strength that is difficult to overlook. The company has paid dividends since 1912. It has increased its payouts twice in the last year, from 72 cents quarterly in March 2011 to 78 cents in June, then up again to 81 cents as of December 2011.

And while crude oil prices have rolled back, let’s not pretend we’re going to get back to $50 per barrel anytime soon, with geopolitical unrest in the Middle East and hungry emerging markets like China and Brazil increasing energy demand at an impressive clip. If you’re a dividend investor looking for a low-risk stock with a reliable revenue stream that ensures juicy payouts, Chevron certainly is worth looking into.

#6: General Electric

General Electric GECurrent Dividend Yield: 3.6%
Performance So Far in 2012: +6%

General Electric (NYSE:GE) might forever be tarnished in the minds of some dividend investors after slashing its payout by two-thirds during the financial crisis. While the quarterly dividend remains about half of what it was — at just 17 cents vs. 31 before the market meltdown — the recent history is worth noting.

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. Now we just received news that General Electric’s finance arm received permission to share some of its wealth with shareholders, too. Specifically, regulators signed off on a special dividend from GE Capital along with permission for the group to resume paying regular dividends later this year.

GE admittedly has its troubles. We saw rather lackluster General Electric earnings in February but a stronger showing in April as GE reported its fiscal first-quarter earnings. With 40% of its revenue coming from GE Aviation, it’s hard for the company to break out without big airplane orders or defense contracts.

But dividend investors should be very encouraged by the GE Capital dividend news. With a 3.6% yield currently, this stock is steadily climbing back into the ranks of one of Wall Street’s best income stocks.

#5: Johnson & Johnson

Johnson & Johnson (NYSE:JNJ)Current Dividend Yield: 3.8%
Performance So Far in 2012: -3%

Johnson & Johnson (NYSE:JNJ) has hit some headwinds in recent years over quality-control issues, calling into question how well-run the company really is. But with a new Johnson & Johnson CEO at the helm, some are hoping that change is in the wind at JNJ. Product recalls have weighed heavily on the company, and consumers and investors alike need confidence for this health care giant to once again win their support.

One thing that never has been uncertain, however, is the dividend potential of Johnson & Johnson. JNJ has raised dividends for 49 years in a row. During the past decade, the company has managed to boost distributions by over 12% per year — all while delivering a headline yield of about 3.6% right now.

And unlike some big pharma stocks that pay nice yields, the biggest dividend driver isn’t prescription drug offerings. While JNJ does offer some vaccines and medical products, consumer health offerings like Band-Aid and Tylenol provide its steadiest revenue stream.

Revenue admittedly has been a bit stagnant at J&J during the past few years. Hence some underperformance. But if you believe projections, Johnson & Johnson could see a stunning 48% 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. (Read why InvestorPlace staffer Tom Taulli thinks that the pros outweigh the cons at Johnson & Johnson now.)

#4: Pfizer

Pfizer (NYSE:PFE)Current Dividend Yield: 3.9%
Performance So Far in 2012: +5%

Pfizer (NYSE:PFE) outperformed the market nicely in 2011 with one of the best returns in the entire Dow Jones — 23% in gains, to be precise. While performance has cooled a bit and Pfizer was sitting on a loss earlier this year, the stock has come roaring back since February as defensive investments like healthcare return to favor.

Yes, long-term challenges at Pfizer are the same as the risks that persists across all of Big Pharma — looming patent expirations, challenges from generic medications and the frantic race to lock up patients in emerging markets. But the goose still is laying golden eggs for shareholders in the form of 22-cent quarterly dividends, with dividend payments dating back to 1901.

Looking forward, the company has a decent research pipeline with some up-and-coming drugs that could rotate in to prop up revenues. Most importantly for dividend investors, the company has $29 billion in cash on the books. Even if revenue hits a hiccup across 2012 — as it did in fiscal 2011 when it slid from $67.8 billion to $67.4 billion — the cash is there to preserve this juicy dividend. (For more, read why Louis Navellier thinks Pfizer stock is a strong buy now.)

#3: Merck

Merck & Co. (NYSE:MRK)Current Dividend Yield: 4.4%
Performance So Far in 2012:

Merck (NYSE:MRK) is very similar to Pfizer (NYSE:PFE) in many ways, though it actually has underperformed the market year-to-date thanks to a slide in the last few weeks after approaching a new 52-week high. 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.

There obviously is not breakneck growth in pharmaceuticals, at least on a share appreciation basis. But 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.

And like its 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.

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

Verizon Communications (NYSE:VZ)Current Dividend Yield: 4.9%
Performance So Far in 2012:

Verizon (NYSE:VZ) remains the leading wireless telecom provider in the U.S. by subscriptions, thanks to the failed AT&T and T-Mobile merger. 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) means this telecom stock is a stalwart that’s here to stay.

Things are in the works to free up some cash at Verizon, too, in an effort to fund growth and perhaps increase dividend distributions. From rumors that VZ will cut back its iPhone subsidy to reports that billions of dollars worth of wireless spectrum could be up for auction, clearly this company isn’t just sitting still.

And if these moves don’t move the stock? Well, you could do worse than an almost 5% annual return via dividends.

#1: AT&T

AT&T TCurrent Dividend Yield: 5.3%
Performance So Far in 2012:

One of the biggest stories in 2011, as previously mentioned, was that AT&T (NYSE:T) tried to leapfrog rival Verizon (NYSE:VZ) in the wireless market via a buyout of T-Mobile. But regulators ran interference, and AT&T abandoned its bid. 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 5.3%, this is a heck of an income play.

The story is the same for AT&T as Verizon, where a strong balance sheet and its entrenched status is 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 delivered pretty strong first-quarter earnings, though, so it’s not like this company is completely stagnant.

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 and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” 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.

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