Top 10 Dow Dividend Stocks for December

Want some reliable income? Try one of these blue-chip companies

By Kyle Woodley, InvestorPlace Managing Editor

Money Dividends 185Well, we’ve made it to mid-December, and there’s no signs that the fiscal cliff will be averted. While a deal still could be in the offing, investors and companies alike are trying to come to terms with the potentially onerous tax burden on dividends they might be forced to face.

That’s resulted in everything from a slew of companies unleashing special dividends or rushing to write their fourth-quarter checks before the ball drops on 2012, to investors fleeing income equities — even ones that won’t be affected.

Not to mention, a no-go in Washington means a huge chunk of government spending is hitting the bricks, which could trigger a big-time selloff across American markets. That said, there’s one thing you can count on: Deal or no deal, stable blue chips paying out fat dividends aren’t going to look any less attractive come Jan. 1.

Through thick and thin, there’s something to be said about established, financially sound American companies. They can climb along with the rest of the market when things go well, but hold their ground when the floor collapses — while giving you a steady stream of income.

Those looking for a low-risk way to ride out the cliff might want to consider these top 10 Dow dividend stocks — all of which yield well over 3%:

#10: Microsoft

Microsoft NASDAQ:MSFTCurrent Dividend Yield: 3.4%
Performance So Far in 2012: +4.4% (vs. +13% for the S&P 500)

Plenty of investors have a lot to gripe about when it comes to Microsoft (NASDAQ:MSFT). After all, shares essentially have been rangebound for the past two years, including returns of just less than 1% despite over 14% returns for the S&P 500.

The company has missed the boat on the mobile side. While Apple (NASDAQ:AAPL) remains the premium player in smartphones and Samsung (PINK:SSNLF) continues to make headway with its Google (NASDAQ:GOOG) Android phones, Windows phones remain at best an afterthought, or at worst a laughingstock. The same goes for tablets. iPad, Kindle, Nook and other names rule the day, while the Surface recently debuted to mixed reviews.

So what’s to love about Microsoft?

For one, its enterprise software still maintains a stranglehold in businesses across the world. In fact, access to legacy products like Office is one of the biggest draws to its Surface tablet. So even if we’re destined never to see hordes of teens carrying around slick new Windows phones, it’s a good bet that Microsoft won’t just suddenly collapse.

And even if MSFT shares can only muster up flat performance in the years ahead, you can take solace in a steady 3.4% stream funded by a king’s ransom in cash.

#9: Johnson & Johnson

Johnson & Johnson (NYSE:JNJ)Current Dividend Yield: 3.45%
Performance So Far in 2012: +8%

Johnson & Johnson (NYSE:JNJ) hasn’t really done much for investors looking for growth over the long-term. In fact, shares are up just 9% from this point three years ago — roughly the amount JNJ has improved this year.

The company had to bring in a new CEO, Alex Gorsky, in April to turn around a company suffering from — to put it nicely — butterfingers on the production line. Plus, Johnson & Johnson and Pfizer (NYSE:PFE) had to walk away from their studies of an experimental Alzheimer’s treatment in summer.

However, Johnson & Johnson is about as dependable a dividend payer as they come. JNJ has tacked a little extra onto its quarterly payouts each and every year for the past 50 years, and has grown dividends by more than 12% annually for the past decade. That includes a June boost from 57 cents to 61 cents quarterly, good for a 3.4%-plus yield on today’s prices. So when we say JNJ is a Dependable Dividend Stock, we mean it.

JNJ also has continued to beat the mark on earnings, with its past couple of reports putting a real jolt into shares.

The company has racked up a few victories in its pharma side, with prostate cancer pill Zytiga getting expanded approval, and canagliflozin — an experimental drug for type 2 diabetes — showing promise. And its consumer health side still creates steady revenue via Band-Aid, Tylenol and Johnson’s baby products. In other words, even if you don’t see breakneck growth in JNJ, there’s plenty keeping shares — and the nice yield — afloat.

#8: McDonald’s

McDonald's NYSE:MCDCurrent Dividend Yield: 3.45%
Performance So Far in 2012: -11%

How did McDonald’s (NYSE:MCD) go from on the Dow Dividend bubble to solidly up the list in just a few months?

Well, a 10% increase in its dividend in the most recent quarter certainly helped.

… Unfortunately, so did a really, really crappy year for MCD stock.

After celebrating a Dow-leading year in 2011, McDonald’s stock has been knocked to the floor with double-digit losses amid a broader bull market run. The company has been dogged by missed expectations on the same-stores front, including a 1.8% decline for October – MCD’s first contraction in that metric for the first time since 2003. That — coupled with a crappy third-quarter earnings report — really greased the rails for a ugly slide.

Still, things aren’t all bad for the Golden Arches.

McDonald’s same-store sales rebounded handily in November, with 2.4% improvement easily topping analysts’ lowball expectations, and the company remains the biggest name in international fast food, as well as one of the best-managed.

Plus, income investors getting in now can enjoy a meaty 3.45% yield that’s sure to go up, as MCD has dutifully bolstered payouts every year since 1976.

#7: Pfizer

Pfizer (NYSE:PFE)Current Dividend Yield: 3.47%
Performance So Far in 2012: +17%

The Big Pharma crowd has long been a mainstay among the top-paying Dow dividend stocks, and more broadly, is close friends with dividend investors. Pfizer is no exception.

Not only does Pfizer yield an attractive 3.47%, but its shares have outperformed the market despite a number of setbacks. Back in August, PFE and Johnson & Johnson shut the door on studies of IV-delivered bapineuzumab as an Alzheimer’s treatment. A little more than a month ago, Pfizer reported profits that fell 14% thanks mostly to a slide in sales of Lipitor — its cholesterol drug that just went off-patent. And most recently (and most embarrassingly), Pfizer had to report the theft of $750,000 worth of gold dust at a Chesterfield, Mo., lab.

The poor earnings report knocked out gains made thanks to things like an animal health spinoff and its big leukemia drug approval in September, but shares have rebounded more than 8% from a mid-November low, thanks in part to excitement over progress in drugs treating breast cancer and preventing blood clots. Plus, there’s reason to really start believing in Pfizer’s pipeline.

#6: Hewlett-Packard

Current Dividend Yield: 3.6%
Performance So Far in 2012: -44%

Of course, while McDonald’s has had a disappointing 2012, Hewlett-Packard’s has just been nightmarish.

Hewlett-Packard (NYSE:HPQ) enjoys a spot in the top 10 Dow dividend stocks’ list not so much because of its dedication to shareholder value — in fact, it’s quite the opposite. HPQ shares have almost been lopped in half this year, which in turn has juiced the stock’s yield to 3.6%.

To its credit, Hewlett-Packard has at least opened the checkbook in the past couple years. HPQ had kept its dividend at 8 cents a share for the better part of a decade, but from 2011 through today it boosted its payout by more than 60% to a current 13 cents quarterly.

And it’s certainly not alone. A growing number of tech stocks have caught the generosity bug this year. Apple made a splash earlier this year by introducing a $2.65/quarter dividend, not to mention Microsoft and Intel (NASDAQ:INTC) occupy spots on this list.

But like Microsoft and Intel, Hewlett-Packard is suffering big-time as it tries to cope in a post-PC world. The company’s foray into mobile is all but nonexistent, it continues to suffer the consequences of poor acquisitions and the best CEO Meg Whitman can offer is, “Just wait!”

While HPQ has enjoyed a nice bounce off the bottom thanks to its increasingly attractive value and dividend — plus rumors that activist investor Carl Icahn is getting in — its place among these other sturdy, high-yielding blue chips might be a bit misleading.

#5: Merck

Merck & Co. (NYSE:MRK)Current Dividend Yield: 3.9%
Performance So Far in 2012:

Merck (NYSE:MRK), just like Pfizer, is a Big Pharma play that delivers in a big dividend way.

But, just like Pfizer, it faces a threat in the form of patent expirations.

Merck’s Singulair — an asthma drug that generates $5 billion in annual sales for the company — went off-patent this year, and in August, the FDA gave the green light to 10 pharmaceutical companies to sell generic forms of the drug.

Still, that hasn’t caused much pain in MRK’s share price, as investors have found other reasons for optimism.

For one, the company got good news earlier this year about a new osteoporosis drug, odanacatib — which is meant to treat post-menopausal women – that powered MRK shares through most of their year-to-date gains. It’s also going after billions of dollars in the Alzheimer’s treatment market with MK-8931, a BACE inhibitor, which it is putting through mid-stage trials this month. And while Merck’s sales in the most recent quarter declined thanks to plummeting sales of Singulair, improving revenues from Januvia — its diabetes drug — helped offset some of the pain.

MRK isn’t going anywhere. It’s continued roll-in of a 2009 buyout of Schering-Plough will help keep Merck’s product line rolling, and a huge war chest of almost $15 billion in cash and short-term investment will keep the plump dividend payouts coming.

#4: DuPont

Dupont (NYSE:DD)Current Dividend Yield: 3.9%
Performance So Far in 2012: -4%

E.I. du Pont de Nemours & Co. (NYSE:DD) — or just DuPont, since there’s no call for formality here — is desperately waiting for a cyclical recovery.

The chemicals giant has an array of widely used products, such as Tyvek house wrap, Lycra synthetic fabrics, Teflon protective coatings, Pioneer seeds and other agricultural options. That diversity of business generally can help DD weather larger market turmoil, while still benefiting from the upward pull of a more positive environment. Though it did give up a bit of that versatility a few months ago when it sold its performance-coatings division to Carlyle Group (NASDAQ:CG).

But because many of its products are tied to business spending, investors might be wary of a turnaround without some sort of cyclical boom.

That came to light last quarter, when DuPont reported disastrous earnings for the third quarter. Profits plunged 98% year-over-year thanks to restructuring and impairment charges, but even adjusted earnings were pinched on lower demand for photovoltaic materials used in solar panels and titanium dioxide, a paint pigment. DuPont also slashed its full-year forecast and announced it would be cutting 1,500 positions worldwide. That report helped knock DD shares into the red for 2012, and it has yet to claw back into black.

DuPont still has strong cash holdings, so you can still believe in its nearly 4% dividend. Plus, DD is using some of the proceeds from its coatings sale to help finance a $1 billion repurchase plan starting in 2013 — though depending on your stance on buybacks, that might not be hopeful news.

#3: Intel

Intel Corp. (NASDAQ:INTC)Current Dividend Yield: 4.4%
Performance So Far in 2012: -16%

Intel’s dividend situation is much like Hewlett-Packard’s in that it’s a product of both increasing distributions (INTC upped its quarterly payout from 21 cents to 23 cents this summer) and share price declines (though admittedly not the kind of drastic declines seen at HP). And like Hewlett-Packard, Intel’s declines have come amid worries about an inability to navigate a post-PC world.

Unlike Hewlett-Packard, Intel might just be a decent turnaround play.

Intel remains the world’s largest semiconductor manufacturer on the planet with almost 16% market share in 2011 — that trumps the No. 2 and No. 3 players combined. And, thanks to its big-time drubbing in 2012, it’s selling at attractive valuations such as a forward price-to-earnings ratio of around 10 and a five-year price/earnings-to-growth ratio of around 0.8. Plus, Intel’s place inside Microsoft’s Surface tablet at least gives it some shot of making ripples in the mobile space.

Yes, it’s a riskier play, at least as far as blue-chip stocks go. Berkshire Hathaway (NYSE:BRK.A, BRK.B) has lost faith in the stock, its most recent earnings report showed declines, and again, the waning of the PC age is a very real threat to Intel.

However, Intel remains the top dog in a broader industry that’s still very important to the future of technology, it throws off a dividend well north of 4% backed by oodles of cash, and it’s currently selling on the cheap.

#2: Verizon

Verizon Communications (NYSE:VZ)Current Dividend Yield: 4.6%
Performance So Far in 2012: 

Verizon (NYSE:VZ) has thrived in 2012, with gains of nearly 11% just a couple percentage points shy of the S&P 500’s performance — not bad for a “sleepy” telecom stock.

A healthy dividend was partly to thank for propelling VZ shares through most of 2012, as income was all the rage. Verizon is the leading wireless telecom provider in the U.S. by subscriptions and gets 50% of its revenue from wireless subscribers. Plus, it’s also a top-tier high-speed Internet provider — an ever-important role as the country continues to hurtle through the digital revolution.

In one way, that’s great. Verizon essentially is a utility stock of sorts, boasting a very stable revenue stream that helps fund those big, fat dividend checks. And while Sprint (NYSE:S) and T-Mobile do provide some pressure on the low-price side, there’s little to challenge its virtual duopoly alongside AT&T (NYSE:T).

On the other side, there’s not a ton of room for growth, as the country is more or less at wireless saturation.

That’s not to say VZ is standing still. Verizon’s Share Everything plan has helped the company tack on a number of new devices on its network — a net 1.5 million devices, to be exact — which helped put a jolt into earnings. Sales of Apple iPhones also helped grease the wheels. And more recently, Verizon and partner Coinstar (NASDAQ:CSTR) unveiled Redbox Instant, which is meant to compete with Netflix (NASDAQ:NFLX) in the streaming video space.

Again, not bad for a sleepy telecom stock.

#1: AT&T

AT&T TCurrent Dividend Yield: 5.2%
Performance So Far in 2012:

Last year, AT&T tried to leapfrog rival Verizon in the wireless market by buying out T-Mobile, but the Department of Justice refused to budge.

Roughly a year later, of course, AT&T watched all of the M&A in telecom pass it by, as T-Mobile made its own successful buyout bid for regional carrier MetroPCS (NYSE:PCS) while Japan’s Softbank swooped in for a 70% stake in Sprint … and AT&T remains America’s No. 2.

In market share, anyway. But at least where it concerns dividend investors, AT&T is the Dow’s top dog. This Dependable Dividend Stock not only has tickled income investors with a substantial 5%-plus dividend, but it also has matched the market and edged out rival Verizon in capital gains for the year-to-date.

AT&T’s story is the same as Verizon’s: It’s a big ol’ pseudo-utility with a rock-solid balance sheet and stable user base … but one with admittedly limited means of growth in a regulated industry. Its most recent earnings report showed profits and revenues that were just about flat year-over-year, and it only gained about 151,000 contract subscribers vs. 319,000 in the year-ago period.

That doesn’t mean you should avoid T shares, though. As long as you go into this venerable blue chip knowing you’re going after slow and steady income for the long haul rather than a quick run-up in shares, AT&T won’t disappoint.

Kyle Woodley is the Deputy Managing Editor of As of this writing, he did not hold a position in any of the aforementioned securities. Follow him on Twitter at @IPKyleWoodley.

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