I’ve got some good news and some bad news for income investors.
Let’s get the bad news out of the way first: Interest rates continue to sit at pathetically low levels. The 10-year Treasury yield still sits below 2%, a return not even high enough to cover the historical average rate of inflation (traditionally considered to be 3% annually).
With the strength of the dollar showing no signs of abating, it’s unlikely the Federal Reserve will take any meaningful actions to tighten and raise rates anytime soon (that would only make the dollar stronger, further depressing corporate profits).
So what’s the good news? The good news is that there’s a better option for income investors: dividend stocks. The stock market doesn’t get much safer than blue-chip stocks, and each of these 10 companies from the blue-chippy Dow Jones Industrial Average offers not only dividend yields north of 3%, but in many cases, some chance at capital appreciation.
Now, let’s look at the 10 best dividend stocks in the Dow Jones for the month of May:
Top Dow Dividend Stocks #10: Merck & Co., Inc. (MRK)
Dividend Yield: 3.1%
YTD Performance: +1%
If you’re looking for low-risk exposure to the healthcare sector, few stocks can compete with Merck & Co., Inc. (NYSE:MRK). With large-cap pharmaceuticals like Merck, you want to see the company looking forward, developing big new drugs with blockbuster potential.
That’s the only way to move the needle.
Thankfully, MRK investors are seeing just that: Merck plans to file for FDA approval in the first half of 2015 for a new hepatitis C drug that could take significant market share from current market leaders Gilead Sciences, Inc. (NASDAQ:GILD) and AbbVie Inc (NYSE:ABBV).
According to Deutsche Bank, if Merck’s patent is granted by mid-2016, by 2017 Gilead’s market share will have declined to 60% from its current 80% share.
Watch out, world.
Top Dow Dividend Stocks #9: Exxon Mobil Corporation (XOM)
Dividend Yield: 3.2%
YTD Performance: -6%
Exxon Mobil Corporation (NYSE:XOM) is one of the best dividend stocks in the stock market today — especially if you judge a dividend by its consistency and not just its yield alone.
And XOM stock has consistently increased its dividend for the past 32 years.
With energy stocks experiencing some rough times over the last year as oil prices fell off a cliff, today is as good a day as any to invest in Exxon. In fact, I recently wrote that XOM stock, along with its largest direct competitor, is an amazing long-term investment opportunity — especially if you set up a DRIP, or dividend reinvestment plan, at the same time.
I’m not the only one who thinks XOM stock trades at a super-attractive valuation. InvestorPlace Contributor Charles Sizemore also recently named Exxon as one of his 10 best stocks for the next 10 years, saying that, “For the first time in a very long time, I can credibly say that XOM is cheap.”
Top Dow Dividend Stocks #8: Pfizer Inc. (PFE)
Dividend Yield: 3.2%
YTD Performance: +12%
Pfizer Inc. (NYSE:PFE), at a market capitalization of $217 billion, is one of the only pharmaceutical companies on the planet that can rival the stability and girth of Merck. And, like Merck, it’s making significant progress on a new drug that could be a meaningful source of revenue in the future. Notes InvestorPlace Contributor Lawrence Meyers:
“Pfizer and Eli Lilly and Co. (NYSE:LLY) recently received some good news from the FDA, which permitted the companies to go to Phase 3 trials for their terminal cancer pain drug, tanezumab.”
Great, right? Well, not so fast. Later in the same Marc 30 article, Meyers goes on to take issue with the current valuation of PFE stock:
“Pfizer earnings for FY15 are expected to decline from $2.26 per share to $2.09, and worse, it’s coming on a 6.2% decline on revenue. That right there is enough to scare me away from Pfizer stock …
Analysts estimate five-year annualized earnings growth of just 2.17%. If you add in the 3.3% yield, a base fair value for PFE would be a mere $12, or 5.5 times earnings … yet PFE stock trades at $34.”
He eventually gives PFE the benefit of the doubt and bumps up his 5.5x multiple to 7x for its cash balance and free cash flow, but notes that at 16x next year’s EPS estimates, PFE stock is too richly priced for any reasonable investor.
Top Dow Dividend Stocks #7: The Coca-Cola Co (KO)
Dividend Yield: 3.2%
YTD Performance: -3%
The Coca-Cola Co (NYSE:KO) has an amazing, 53-year record of dividend growth. It’s proven its ability to responsibly weather recessions and stiff competition over that time without needing to cut its dividend or even keep it stagnant. But KO is arguably facing an entirely new obstacle now: a serious shift in consumer tastes.
Soda is on its way out, as InvestorPlace.com Editor Jeff Reeves recently explained in his piece, “KO Stock — Coca Cola Faces the Death of Soda Sales.” Despite seeing revenue growth for the first time in nine quarters and beating EPS estimates, Reeves is skeptical:
“But I don’t think this is necessarily a sign for investors to breathe a sigh of relief. Because in the details of the Coke earnings report was a disturbing sign for the soda giant, as one of its most iconic products — Diet Coke — saw sales plunge 6% globally last quarter.”
He also notes that Coca-Cola is experiencing a troubling 10 straight years of falling soda sales “across all brands and flavors.”
That’s a mighty tough obstacle to overcome, and a relatively unprecedented one for KO at that.
Top Dow Dividend Stocks #6: Procter & Gamble Co (PG)
Dividend Yield: 3.3%
YTD Performance: -11%
With Procter & Gamble Co (NYSE:PG) stock, we have a record of nearly unrivaled consistency, at least as far as dividends are concerned. PG stock has, each and every year for the last 59 years, raised its dividend.
As an investor, you can sleep soundly knowing that each month, you’ll get a check in the mail from Procter & Gamble.
But one of the biggest problems plaguing PG stock is also one of the reasons the Fed is hesitant to hike interest rates: the strength of the U.S. dollar. As a truly global consumer goods powerhouse, Procter & Gamble relies heavily on its overseas business. That’s part of the reason InvestorPlace Contributor Richard Saintvilus thinks PG stock is a lousy bet, especially after its most recent quarterly revenue miss:
“So at around $82 per share and down almost 15% from its October high, PG stock is now in bearish territory. Sure, the dividend makes it attractive. But with full-year earnings projected to be in line to down in low single digits year-over-year, why not wait to buy the stock at a cheaper price?
And with PG stock — at a price-to-earnings ratio of 24 — trading at a slight premium to the S&P 500 (P/E of 21), the stock should be avoided until it reaches $78, or 5% lower.”
At $78, PG’s dividend yield would be a moderately more attractive 3.4%.
Top Dow Dividend Stocks #5: Caterpillar Inc. (CAT)
Dividend Yield: 3.3%
YTD Performance: -7%
Like many other companies on this list, Caterpillar Inc. (NYSE:CAT) stock boasts an impressive dividend yield but faces some serious and fundamental issues with its business.
And really, that’s how a number of companies have seen their yields bloom of late — share prices fall, and as a result, their dividend yields climb. CAT stock, off 8% on the year, unfortunately fits that mold. Investors were rather indifferent about Caterpillar’s first-quarter results, as the stock traded sideways immediately after earnings despite an EPS beat. While CAT was able to make up for its weakness abroad by turning to a strengthening North American economy, CAT could use some strength overseas to help its stock along. Notes InvestorPlace Feature Writer Dan Burrows:
“Sales in Asia tumbled 21% in the first quarter because of China and the strength of the dollar against the Japanese yen.
Latin America was hit even harder, as sales fell 23%. The dysfunctional and shrinking economy of Brazil was largely to blame.”
Yikes. If you’ve got a truly long-term time horizon, then CAT stock is probably a nice contrarian bet. But if you can’t stomach a declining stock price in the near-term, Caterpillar probably isn’t the best stock for you.
Top Dow Dividend Stocks #4: General Electric Company (GE)
Dividend Yield: 3.4%
YTD Performance: +6%
Shares of General Electric Company (NYSE:GE) shot higher on April 10 after the company announced it was selling the vast majority of its financing arm, GE Capital. Investors may remember GE Capital as the division that nearly brought the iconic company to its knees during the financial crisis. It also caused GE to suddenly slash its dividend.
Those days are over. Even after five straight years of repairing its dividend, GE wants to simplify and de-risk its business. Still the country’s seventh-largest bank by assets, GE is getting back to the basics by exiting most of the business. It’s a continuation of a recent strategy, notes Dan Burrows:
“GE already has a deal to sell $26.5 billion worth of office buildings and commercial real estate debt to Blackstone Group LP (NYSE:BX), Wells Fargo & Co (NYSE:WFC) and other buyers, according to The Wall Street Journal. GE previously spun off its private-label credit cards and retail-finance businesses into a separate company, Synchrony Financial (NYSE:SYF).”
As far as dividends go? It may pay as much as $35 billion out to shareholders, and already vowed to buy back $50 billion in stock.
Top Dow Dividend Stocks #3: McDonald’s Corporation (MCD)
Dividend Yield: 3.4%
YTD Performance: +5%
I hate to say it, but about the only thing McDonald’s Corporation (NYSE:MCD) is getting right nowadays is its dividend, which has increased for 38 straight years.
In the restaurant industry, there’s almost no metric more important than same-store sales, or comps, which measure the year-over-year sales growth at locations open for at least 12 months. Take a second to digest that, then digest the fact that those comps have been in miserable freefall for years now at McDonald’s.
If investors are vain enough to think that testing out serving breakfast all day will materially change things, well, they can choose to believe that at their own risk. Both EPS and same-store sales missed expectations in the most recent quarter, and yet MCD stock rallied after the announcement — merely because the company’s new CEO, Steve Easterbrook, promised that a nebulous turnaround plan was in the works and would be unveiled on May 4.
Consider me skeptical that the new CEO can do anything substantially different from the old one.
Top Dow Dividend Stocks #2: Chevron Corporation (CVX)
Dividend Yield: 3.9%
YTD Performance: -2%
Chevron Corporation (NYSE:CVX) may be the single most attractive stock on today’s list. Like XOM, it’s weathering a pullback in oil prices that’s threatening to put many small- and mid-sized U.S. shale producers out of business.
Although oil prices are still off about 40% from 52-week highs, CVX stock is only down 11% over the same period. It doesn’t hurt that CVX is a diversified global energy powerhouse worth $207 billion with both upstream and downstream operations. In other words, Chevron always hedges its bets: While its upstream drilling operations have become less profitable, its downstream refining business enjoys better margins when oil prices fall.
Long-term investors should consider taking advantage of Chevron’s recent pullback by setting up a DRIP, or dividend reinvestment plan. It sounds boring, but the returns can be remarkable.
Top Dow Dividend Stocks #1: Verizon Communications Inc. (VZ)
Dividend Yield: 4.4%
YTD Performance: +7%
For a while there, Verizon Communications Inc. (NYSE:VZ) forgot what it felt like to be the top dividend-paying blue-chip stock. That’s because rival AT&T Inc. (NYSE:T) and its 5.5% dividend was, month after month, the Dow dividend champion.
How long can VZ reign as the natural successor to AT&T as the Dow’s top dividend stock? That depends, in part, on how it handles the increasing popularity of streaming video. It recently changed its Verizon Fios cable package options, giving consumers a wider variety of less-bundled offerings in an effort to adapt to a competitive environment increasingly embracing a la carte offerings.
But it’s worth noting that ESPN appears to object.
As of this writing, John Divine was long shares of AAPL stock. You can follow him on Twitter at @divinebizkid or email him at email@example.com.