Last Friday, the S&P 500 closed right at its key technical resistance of 1900. Previously, the benchmark index twice failed to break through that level, only to be followed by sharp pullbacks of 50-60 points that incited “false breakout” criticisms. There were cries of “look out below” and concerns that the bull market had peaked, but as the CBOE Volatility Index (VIX) trades at historic lows — implying investor complacency — the pop in the S&P to fresh all-time highs hasn’t been met with any particular fanfare.
The rally that looked like it had legs at the end of last year hasn’t really materialized in 2014, and the bond market, which showed all the signs that higher yields were ahead, never played out that way, either. On a year-to-date basis, the numbers are pretty flat:
- S&P 500 +3.9%
- Dow +0.7%
- Nasdaq +1.7%
- Russell 2000 -2%
The latest release of the Case-Shiller 20-City Index showed a resumption of upward movement in home prices, and durable goods for April showed a gain of 0.8% versus forecasts for a 1.3% decline. Both of these provide further evidence for the camp that suggests second-quarter GDP will register a gain well north of 3%. All the while, bond yields remain low as investors cite concerns of the recovery’s sustainability, lagging employment, poor wage growth and Fed tapering.
Even as the S&P is taking out a significant resistance level, bond yields are moving lower. The 10-Year Treasury note yield is trading below the 2.50% level, which is truly a counterintuitive trend for a stock market that is pressing to new all-time highs. Evidently, the bond mavens have no fear of inflation, Fed tapering or the potential for a tightening of the fed funds rate.
In any case, the rally in bonds is acting as a catalyst for boosting money flow into high-yield assets where there are some exceptional payouts to be had. And for steady and reliable dividends, look no further than the “Dogs of the Dow,” which are the top 10 highest-yielding stocks in the Dow Jones Industrial Average. These blue-chip names pay out sizable yields ranging from 3.1% to 5.2%, all of which beat the measly 2.45% current yield on the 10-Year Treasury by a wide margin.
With that in mind, here are the top 10 Dow dividend stocks by yield for May. (Note: All yields and returns are as of 5/29.)
Top Dividend Stock #10: Merck (MRK)
Dividend Yield: 3.05%
YTD Performance: 15.28%
52-Week Return: 22.35%
Merck (MRK), along with the rest of the health care sector, has performed exceptionally well against the broad market since the beginning of the year. The blue-chip provider of prescription medication, vaccines and consumer care products traded to a new 52-week high in early May and, although it remains only slightly below that level, the stock trades with a yield of just over 3%.
A number of patent expirations impacted Merck’s first-quarter results when the company reported at the end of April. Revenue fell to approximately $10.3 billion and missed the consensus estimate, amounting to a decrease of about 4% from the same quarter a year earlier. However, the company stated that part of the decline was attributable to foreign exchange issues.
On the other hand, the company beat on an earnings per share (EPS) basis, positing an 11.4% upside surprise of $0.88 versus forecasts of $0.79. After gapping higher following its report, the stock traded down below $55 at which point it began to once again catch investors’ attention.
This week, MRK’s board of directors announced another dividend installment of $0.44 per share, which makes for an annual payout of $1.76. The shares trade ex-dividend on June 12, and the payout is scheduled to hit accounts on July 8.
Top Dividend Stock #9: Cisco (CSCO)
Dividend Yield: 3.08%
YTD Performance: 10.03%
52-Week Return: 4.89%
Cisco Systems (CSCO) gapped higher by 6% when it reported its latest earnings results in mid-May, and that’s not the only good news for the information technology and Internet protocol giant. This week, CSCO gapped up again when it was upgraded from “hold” to “buy” by Deutsche Bank, which raised its price target for the stock from $25 to $30.
On the earnings front, the company reported revenue that fell to $11.5 billion from 12.2 billion from a year earlier, while profit figures declined to $2.2 billion from $2.5 billion. However, investors seemed to pay more attention to its EPS results, which beat estimates by 7%, coming in at $0.46 per share against the consensus of $0.43.
The company cut its long-term growth forecast last year, but has been slowing recovering ever since. After appreciating 10% year-to-date, CSCO still trades with a P/E ratio far below peers. The 16.8 P/E multiple presents an attractive value play at these levels, as rest of the stocks in its sector carry an average P/E ratio of 40.5.
Even with its strong performance in 2014, Cisco’s dividend yield remains at a solid 3.1%, and the payout ratio of just 41% suggests there is room for another distribution hike down the road.
Top Dividend Stock #8: Procter & Gamble (PG)
Dividend Yield: 3.20%
YTD Performance: -1.24%
52-Week Return: -1.81%
Procter & Gamble (PG) is the largest company in the consumer goods space with a market capitalization of over $217 billion. Although the stock hasn’t moved much over the past year, its distributions have. In fact, PG has raised its dividend every year for 57 consecutive years.
The latest increase, from 60.15 cents to 64.36 cents per share, was announced last month and helped give the stock a nice boost up to the $83 level, though it has since come back down. Actually, the shares have been falling since it released its latest earnings results at the end of April, in which the company reported earnings per share of $1.04 and revenue of $20.6 billion versus estimates for $1.02 and $20.67 billion, respectively.
The bigger payout, coupled with its recent decline, has pushed PG higher by two spots on our list of Dow dividend stocks, and the current yield now stands at 3.2%. While the payout ratio has risen over the past several years, the company has been buying back a significant amount of shares in order to keep EPS figures in line with its increased distributions.
Additionally, the company’s 21.4 P/E ratio is roughly in line with its peer group. While it does not stand out in terms of valuation, analysts are expecting the company to grow earnings at a rate of approximately 8.6% over the next five years, which is something many consumer products companies are often unable to do.
Top Dividend Stock #7: McDonald’s (MCD)
Dividend Yield: 3.20%
YTD Performance: 4.44%
52-Week Return: 1.05%
Though the rotation into blue-chip value plays has started to slow down, McDonald’s (MCD) has still been able to attract investors with its solid 3.2% dividend yield. Considering that MCD has a P/E ratio of just 18.1 compared to Burger King’s (BKW) 35.6 multiple and Wendy’s (WEN) 36.4 multiple, it’s not hard to see why the company has been showing strength against its peers in 2014.
In the latest quarter, the company reported revenue of $6.7 billion that was in line with estimates, while EPS of $1.21 missed the consensus by a few pennies. Despite the mixed results, the release seemed to act as a catalyst for a rise in the share price and helped to push the stock over the $100 level for the first time in almost a year.
MCD recently announced its “Plan to Win” strategy at the Sanford C. Bernstein Thirtieth Conference, which it will use as a basis for optimizing its menu, improving customer experience at its stores and broadening its reach to consumers. Additionally, the plan outlines how the company will return cash to shareholders at a target amount of between $18 and $20 billion over the next three years via distributions and share buybacks.
Analysts don’t believe that MCD can grow at the same high rate as its competitors, but its relatively-low P/E ratio and steady 3.2% yield make MCD a great stock for the conservative dividend investor’s portfolio.
Top Dividend Stock #6: General Electric (GE)
Dividend Yield: 3.29%
YTD Performance: -4.60%
52-Week Return: 13.64%
General Electric (GE) fell back with the rest of the broad market in early February, but the stock has been slowly recovering since then as investors take another look at this leader among blue-chips.
Similar to Procter & Gamble (PG), the nature of GE’s business is largely insulated from the negative effects of a weak economy, and that makes it an appropriate holding at a time when first-quarter GDP was just revised down to -1%. Over the last few quarters, revenue has been falling while earnings have been on the rise, and investors seem to be OK with that.
The company plans to stimulate further growth through advancements in its health care and energy segments, and will attempt to raise up to $3.5 billion from the spinoff of its consumer finance business, GE Capital. Both strategies should go a long way towards increased earnings and, subsequently, increased dividend payouts. Analysts seem to agree and are estimating a long-term earnings growth rate of 8.3% over the next five years.
The current payout ratio stands at just over 52%, which leaves room for future dividend hikes. However, the company has already been raising its distributions for four years in a row and sports an annualized three-year dividend growth rate of close to 20%. The current annual payout of $0.88 is twice what it was only five years ago and makes for a 3.3% yield and is among the best in the Dow Jones.
Top Dividend Stock #5: Intel (INTC)
Dividend Yield: 3.34%
YTD Performance: 3.87%
52-Week Return: 12.69%
While the rest of the tech sector was enjoying a huge run-up in 2013, Intel (INTC) has experienced declining earnings for several quarters in a row now due to the continuing slump in PC sales.
To deal with that issue, however, INTC has been busy with its research and development efforts, spending a record $10.6 billion on R&D in 2013. In order to remain competitive with its peers, INTC has been forced to branch out from its traditional role in the PC world.
Building on the Internet of Things (IoT) theme, the company recently announced a new line of hardware and software solutions aimed at the burgeoning autonomous vehicle market. Intel’s IoT Group brought in revenue of almost $500 million during the first quarter of 2014, representing a year-over-year increase of over 30%.
As Doug Davis, corporate vice president for INTC’s IoT segment, stated in a press release, “Our goal is to fuel the evolution from convenience features available in the car today to enhanced safety features of tomorrow and eventually self-driving capabilities.”
If you’re willing to wait for INTC to pull itself back up after a few rough quarters, holding the shares will earn you an annual dividend yield of 3.3%. Even as the stock is hitting new 52-week highs, its P/E ratio of just 14.5 versus the industry average of 22.9 makes it look like a good play for the value investor.
Top Dividend Stock #4: Chevron (CVX)
Dividend Yield: 3.50%
YTD Performance: -2.07%
52-Week Return: -2.50%
Chevron (CVX) has been essentially flat for the year, but the stock has a number of things going for it that point to a bright future. At its annual shareholders meeting, the company announced that its production growth in the areas of deep-water drilling, liquefied natural gas (LNG) and shale oil all remain on schedule.
CVX expects to produce 3.1 million barrels of oil-equivalent per day by 2017 — approximately 20% higher than its production from last year — which it should be able to accomplish given the fact that it has over 70 pipeline projects either underway already or due to begin by 2020.
The company already has major LNG projects in the works in Australia, which are scheduled to come online within the next two years and will be essential in fostering strong future growth. Additionally, CVX is set to add to its existing presence in Canada by 2017, which at this time accounts for only a small portion of CVX’s overall annual production.
From a valuation standpoint, CVX is relatively cheap, with an 11.9 earnings multiple compared to rival Exxon’s (XOM) P/E of 13.8. Chevron also bests Exxon in terms of dividend payouts, as the current 3.5% yield on shares of CVX is almost a percentage point higher than the 2.75% yield for XOM shares.
Top Dividend Stock #3: Pfizer (PFE)
Dividend Yield: 3.51%
YTD Performance: -3.36%
52-Week Return: +1.93%
Pfizer (PFE) is one of the largest pharmaceutical companies on the planet, with a market capitalization of $188 billion. The stock has been falling sharply over the past month after failing to secure a deal to buy out London-based biopharmaceutical company AstraZeneca PLC (AZN), and it will be another three months at the minimum before they will be able to make another bid.
AZN rejected Pfizer’s most recent offer of $117 billion, which, if completed, would have been the largest takeover of its kind in history. Despite the fall-through, analysts at Goldman Sachs put a “buy” rating on the stock this past Wednesday with a price target of $35, which represents potential upside of 18.6% from current levels.
Goldman wasn’t the only big bank to weigh in, however. Researchers at JPMorgan Chase reiterated an “overweight” rating on the stock this week, and they too set a price target of $35 for PFE. After its recent fall, which has pushed the yield up to a very handsome 3.5%, the stock carries a P/E ratio of 18 and, with endorsements from two of Wall Street’s most respected firms, dividend seekers should feel comfortable adding shares on this pullback.
Top Dividend Stock #2: Verizon (VZ)
Dividend Yield: 4.26%
YTD Performance: 1.18%
52-Week Return: -3.25%
The vote of confidence by the “Oracle of Omaha,” as it seemed to be interpreted by investors, caused the stock to gap higher by 2% the day after the news broke. VZ presents a good value investment at the moment, which Buffett likely recognized, and its P/E multiple of 11.1 is much more attractive than the 18.3 industry average.
Earlier this year, Verizon also closed a deal worth approximately $130 billion to acquire Vodafone’s (VOD) 45% stake in Verizon Wireless, from which VZ expects to generate an additional boost in earnings per share. Although EPS for the latest quarter came in below expectations, the $0.84 reading represented an increase of 27.3% increase over the prior quarter’s $0.66 result.
The stock has been rising steadily since hitting a recent low late in April but, if you act now, you can still get in on the 4.3% dividend yield before the next quarterly payout.
Top Dividend Stock #1: AT&T (T)
Dividend Yield: 5.25%
YTD Performance: 0.65%
52-Week Return: -3.7%
AT&T (T), the largest telecommunications provider in the United States, agreed last week to buy satellite TV provider DirecTV (DTV) in a deal valued at approximately $67 billion. The acquisition is largely aimed at expanding AT&T’s overall business and boosting its number of paid TV subscribers, of which DTV currently has over 20 million.
Right now, the majority of T’s revenue comes from their wireless business, but that should even out as the company extends its reach to additional television subscribers. As stated in a press release by AT&T, “The transaction combines complementary strengths to create a unique new competitor with unprecedented capabilities in mobility, video and broadband services.”
Last month, in AT&T’s first-quarter earnings report, the company was able to squeeze out an EPS beat of just a penny, but that accounted for an 11% increase over the reading from the first quarter of 2013. For the second time in a row, the company declared a quarterly payout of $0.46, which makes for a current yield of 5.25%. Also, with a payout ratio of only 68% and 29 years of dividend increases, there is still room for higher payouts ahead.
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.