The Dow Jones Industrial Average has long been sold to investors as one of the best, safest places to put your money. Dow dividend stocks, as a result, have been a buy-and-hold safe haven for decades.
Dividends — those sweet regular payments that companies make to shareholders — mean vital income for many older investors.
Safety and dividend yield were what Charles Dow was looking for when he crafted his first list of 12 industrial stocks on May 28, 1896, for his and Edward Jones’ Wall Street Journal. One company — General Electric Company (NYSE:GE) — remains from that original group. The others were broken up by the government, turned into divisions of other firms or (like National Lead) just sank out of sight.
Today’s list is heavy on technology but also includes oil companies, retailers, tech companies and financials. In my 30 years as a self-directed retirement investor, I have owned a dozen of them at one time or another.
As we age, our investing goals change. At 62, I’ll soon be less interested in growth, more interested in income to take me through my retirement. That’s where Dow dividend stocks shine.
For those on the hunt for income, we’ll examine the top 10 Dow Jones Industrial Average components by yield as we head into February. Every stock on here yields at least 3.2% — not too shabby in a world where the 30-year U.S. bond is still yielding just 3.03%.
But important to note is that while all of these stocks are good yielders, not all of them are winners. This look at the Dow 30’s highest-yielding dividend stocks is meant to help you separate the wheat from the chaff.
Top 10 Dow Dividend Stocks for February: #10, Caterpillar (CAT)
CAT Dividend Yield: 3.2%
Caterpillar Inc. (NYSE:CAT), the Peoria, Ill.-based maker of heavy equipment, has been shrinking since 2012, because much of its equipment is sold for moving coal and other resources out of the ground and to the market.
Caterpillar is heavily tied to agriculture, and farm income has also been falling since 2012. Oversupply means lower income, and many farmers can’t pay their debts — much of which were taken out to buy Caterpillar equipment. On a trip to the Midwest last summer, I saw corn that was literally as high as an elephant’s eye, but I saw very few happy farmers.
That may change this year. Prices on corn futures have been rising and corn prices should be at $4 per bushel early next year. In anticipation of better days, CAT stock is up 40% over the last year. This comes on top of a 77-cent quarterly dividend that currently yields a little more than 3%.
Most analysts have Caterpillar rated only as a hold, estimating earnings for 2017 at $3.26 per share — not enough to cover that dividend.
I have not added CAT to my portfolio, but that doesn’t mean I’m not optimistic about this Dow stock. Caterpillar still has positive operating cash flow. Management has held the line on debt, even while asset values have gone down. Belts have been tightened, and better business anywhere — as from a big Trump infrastructure plan — would fall mostly to the bottom line.
Caterpillar’s $2-per-share loss last week on revenues of $9.6 billion sent shares down a bit, as many investors see this as the bottom for the current cycle.
CAT is leveraged to profit from growth. I see the price as rich here — the stock has been on fire since the election — but a realistic price in the low $90s could be a buying opportunity.
Top 10 Dow Dividend Stocks for February: #9, IBM (IBM)
IBM Dividend Yield: 3.2%
I am known around InvestorPlace as a hater of International Business Machines Corp. (NYSE:IBM), but I have not always hated the company. I owned it early in this decade, seeing a nice dividend and a share price that by 2012 was pushing $200 per share.
Now, among Dow dividend stocks, IBM is a loser.
IBM reported its full-year results on Jan. 19, and fourth-quarter revenues of $21.77 billion were indeed more than the previous quarter’s $19.23 billion. But don’t be fooled. During the previous quarter, the company had revenue of $22.06 billion, and it delivered over $250 million more net income during that quarter than in 2016, too.
For all the brave talk about Watson — the artificial intelligence software IBM has been using in ads the way it used Charlie Chaplin in the 1980s — much of its profit still comes from mainframes. Mainframes are dying. A lot of its software serves mainframes and corporate networks. Corporate networks are being replaced by IP networks.
As in the past, IBM has been trying to buy its way out of trouble, buying Truven Health Analytics a year ago, for $2.6 billion, a Salesforce.com Inc. (NYSE:CRM) integrator called Blue Wolf for $200 million, and some other pieces in cloud security and recovery — areas that are growing.
But the boat continues to open new leaks. In recent years, IBM was forced to literally give away its chip-making business, paying Global Foundries $1.5 billion to take it off its hands. Businesses like Rational Software, bought in 2003 for $2.1 billion, are being sold in pieces because they no longer make sense. IBM is out of PCs, out of mini-computers, out of printers, even out of what used to be cash registers.
IBM is like a beautiful old house with a huge mortgage whose owners are selling the china and silver to pay for their healthcare. They may look good at the club, in their tennis whites, but behind the curtain, it’s Grey Gardens.
IBM has growing debts, declining profits and an ossified corporate culture where selling and marketing mean more than creating technology breakthroughs and solving real problems.
I don’t care if Warren Buffett still loves IBM. I don’t. I’m afraid I never will again.
Top 10 Dow Dividend Stocks for February: #8, General Electric (GE)
GE Dividend Yield: 3.3%
Charlie Dow knew a good long-term play when he saw one. General Electric Company (NYSE:GE) has the longest tenure among Dow dividend stocks, 121 years on.
Dow might even recognize Jeff Immelt’s GE. So might Charles Coffin, who was president of the General Electric Co. in 1896. GE today, as in 1896, is mostly in the power business. It makes engines and generators. It also makes products that bring fuel to the surface, and last November bid to take over most of Baker Hughes Incorporated (NYSE:BHI).
GE is up 8% over the year and sports a 3%-plus dividend, which means a total return of about 11%. Almost half the analysts following it say to buy, and the average rating is “overweight.” They expect earnings of $1.69 per share this year — plenty to cover the 98-cent annual dividend, which rose by a penny late last year.
As I recently wrote, GE is a company that over-promises and under-delivers. It isn’t going to fail, but it isn’t going to boom, either. It may do well if oil booms again, but under Immelt, GE has become a Waiting for Godot stock … and in the play, Godot never showed up.
I owned GE for most of this decade, and enjoyed a decent return, but I see a limited horizon for the oil and gas business — higher prices will just bring more supply, driving prices back down again. Add to that the fact that renewable energy supplies, especially efficiency, are increasing and getting cheaper.
Yes, it makes wind turbines and it’s all over efficiency, but I’m not feeling the return there.
Top 10 Dow Dividend Stocks for February: #7, Cisco Systems (CSCO)
CSCO Dividend Yield: 3.4%
For one brief shining moment in the year 2000, Cisco Systems, Inc. (NASDAQ:CSCO) was the world’s most valuable company. Their Internet switches and routers connected the world, and the ceiling for growth seemed unlimited.
This was back when my kids were in grade school and I rocked a red beard, with a fedora. Good times.
Today, CSCO is a solid dividend stock. The 26-cent quarterly dividend yields 3.4%. It’s a little like me: a distinguished white-haired gentleman. If you bought it when it made that turn in 2011, at $15, its 6-cent payout has more than quadrupled, and you have an annual yield of 6% on that investment. Cisco can afford the dividend, too, as it usually earns about twice its payout.
But there is danger in the air.
Hardware is becoming software. The function of a switch or a writer can be done by any PC with ports and the write software. The trend is called Software Defined Networking. Cisco is thus rushing to become a software company, buying AppDynamics for $3.7 billion, becoming a force in computer security, and raising the percentage of revenue from software to 29%.
Analysts are divided between those who tell people to buy Cisco, and those who just want you to hold it. I once owned this stock, and I am not divided. I say avoid it. If you’re to buy into technology, you need to get in on the leading edge, and switches are no longer the leading edge.
Technology evolves rapidly. When a technology company ceases to be on that leading edge, it starts to die. This can happen very quickly, as Nokia Corp. (ADR) (NYSE:NOK) discovered with the debut of the iPhone 10 years ago. And there may be nothing that can be done, as Novell learned when the internet replaced its networking system. Also, the industry seldom allows for second acts.
I do not envy the job of Cisco CEO Chuck Robbins, who succeeded the legendary John Chambers in 2015. Selling any kind of hardware in a cloud-based era is a very difficult thing to do, and margins will remain compressed.
Top 10 Dow Dividend Stocks for February: #6, Coca-Cola (KO)
KO Dividend Yield: 3.4%
I admit to a bias on behalf of The Coca-Cola Co (NYSE:KO).
I was raised on Coke on Long Island. I never liked Pepsi. (Pro tip: The secret ingredient is vanilla.)
I moved to Atlanta in 1981, and Coca-Cola built Atlanta. There is no other reason for a city to be here, save the sugar water that Robert Woodruff took around the world. Woodruff convinced corporations to put regional offices here, his boyhood friend Bill Hartsfield (of the airport) helped make the city an island of relative peace during the Civil Rights era, and as “Mr. Anonymous” he contributed much of the civic infrastructure, like the Arts Center and most of the Emory University campus, which drives Atlanta today.
Oh, did you ever wonder why Santa Claus wears a red coat? That’s Coca-Cola red.
I have owned Coca-Cola stock in the past. I got out because it’s just not growing — revenues are down 10% since 2012, and operating margins have been declining. Don’t let anyone fool you about what they make, either. It’s not so much sugared water as it is treated water. Mr. Woodruff said in 1923 to make every Coca-Cola (we call it Co-Cola down here) taste like every other Coca-Cola, no matter where you bought it, and that made the company an early leader in water treatment. If you don’t trust the water on your travels, buy a Coke. It won’t hurt you.
That said, there may finally be a reason to buy Coke stock again, and his name is James Quincey. Quincey becomes CEO on May 1 and is already credited with growing profits through smaller cans and buying new brands like Jugo de Valle, a Mexican juice producer.
Coke now has 20 brands with over $1 billion in sales, including Dasani water, Odwalla juices and Honest Tea. If you buy a can of hot coffee from a vending machine in Japan, it’s probably Georgia, another Coke product.
Coca-Cola delivers a steady $10 billion in operating cash flow each year, and continues to cover its 35-cent quarterly dividend with earnings. A 10% price decline since April has goosed the yield a bit — and you want to buy a dividend stock when the price is down, like now, but when there is a little bit of excitement around it, like now.
Top 10 Dow Dividend Stocks for February: #5, Boeing (BA)
BA Dividend Yield: 3.5%
I am a former shareholder of Boeing Co (NYSE:BA), having sold out last spring at about $130 per share.
This was a mistake, as Boeing shares are now worth $169 — one-third more than they were when I sold. Even at that price, however, the recently announced $1.42-per-share dividend sports a yield of 3.5%. Boeing delivered $10.5 billion in operating cash flow during the fourth quarter, and forecast 2017 earnings of $9.10 to $9.30 per share, meaning that new dividend should be safe.
Since orders for new planes peaked in 2014, Boeing has been focused on productivity and cost-cutting, moving production from Puget Sound, where the company is headquartered, to Charleston, South Carolina, which for now is not unionized.
But after a failed attempt to move production offshore early in the decade, I questioned just how much more costs could be driven out of plane production, which is why I foolishly sold.
Boeing is increasing its delivery of aircraft in 2017 and plans to get into the space business in 2018. If it can pick up more military contracts, the stock could be worth its current price, which has reached analyst targets and thus could be subject to profit-taking.
If profits are taken and the price falls, however, jump in. Profit-taking will be limited by the increased dividend, whose yield puts a floor under that price.
In short, Boeing truly is among the “top” Dow dividend stocks, in that it makes more than enough to cover what it pays out, and it has good enough prospects to be worth holding for years to come.
Everybody goofs at some point.
Top 10 Dow Dividend Stocks for February: #4, Exxon Mobil (XOM)
XOM Dividend Yield: 3.6%
No Dow stock was as ready for Trump as Exxon Mobil Corporation (NYSE:XOM), whose CEO Rex Tillerson is close to being confirmed as Secretary of State.
Exxon rose sharply after the election, by more than 10% in about a month. But it has since given up most of those gains, helping expand its yield to 3.6%. The question is whether that dividend can be sustained into the future. Exxon hasn’t brought in more than 75 cents per share in net income since the end of 2015, and that was not expected to change when it reported earnings on Jan. 31. The street’s “whisper number” of 68 cents per share — what analysts are supposedly telling each other what to expect — is below the consensus earnings estimate of 72 cents.
The bull case for Exxon has always been based on its balance sheet. The company has nearly $340 billion in assets, and the $46 billion in debt it had against those assets in October was among the lowest figures in the industry. Tillerson managed Exxon Mobil conservatively during the oil bust, which turned out to be a wise move as operating cash flow deteriorated sharply through the first quarter of 2016.
Exxon Mobil is called an “integrated international” oil company, with production assets around the world, along with refineries, tankers, and gas stations. This let it squeeze out margins even when oil prices were at their lowest, through refining, trading and running gas stations.
The company is hedging its bets on international growth, buying oil assets in Texas’ Permian Basin for $5.6 billion up-front and as much as another $1 billion over the next few years. It’s also hedging its bets on the climate, appointing environmental scientist Dr. Susan Avery to its board of directors — a move Tillerson would have been unlikely to make and one that shocked some Trump allies. The fact is XOM now has allies in Washington to fight its political battles, and it can expect good news on that front for some time to come.
In the near-term, this makes Exxon Mobil stock a buy and, for income investors, a bargain.
Top 10 Dow Dividend Stocks for February: #3, Chevron (CVX)
CVX Dividend Yield: 3.9%
Chevron Corporation (NYSE:CVX) is the anti-Exxon. More precisely, Chevron is everything Exxon Mobil is accused of being, and a little bit more.
Chevron is a more aggressive polluter — and a more aggressive litigant against paying for pollution — than Exxon Mobil. Chevron is also less committed to downstream retail, thus more dependent on crude prices, than Exxon Mobil.
CVX also is a bit more generous, with its dividend near 4% to current buyers. But should you be one?
Personally, I don’t think so. Chevron lost money for three of the last four quarters, making that dividend harder to justify. Its debt-to-assets ratio has been rising faster than Exxon Mobil’s, and until the September quarter, its operating cash flow had been falling steadily.
Things are getting worse for Chevron, even while they seem to be getting better for Exxon Mobil. CVX missed badly on optimistic estimates for its December quarter, with a profit of 22 cents per share on revenue of $31.5 billion. Analysts had been expecting a 65-cent profit. That’s not a miss … that’s a mile.
Bulls expect Chevron to score big profits from a return to drilling in the Gulf of Mexico. I do not.
Going back to Q4 earnings, note that revenues did beat. But profits were down because profits from refining fell 65% year-over-year, to $357 million. If the Gulf doesn’t yield big profits, if oil prices don’t stay high, or if there’s an accident, that dividend — which was hiked a penny last fall to $1.08 per share — will be at serious risk.
Income investors can’t just look at yield. They need to look at earnings as well. If earnings don’t match the dividend for long enough, and there’s a dividend cut, you’re going to take some big losses.
I think the risk of that happening to Chevron is bigger than that happening to Exxon Mobil.
Top 10 Dow Dividend Stocks for February: #2, Pfizer (PFE)
PFE Dividend Yield: 4.1%
Pfizer Inc. (NYSE:PFE) is a great dividend stock as far as yield is concerned. But can you trust it?
But can you trust it? This is not just a question of whether the company can afford to pay shareholders out of earnings (which Pfizer usually can’t). It’s also a question of whether the company even wants to run as a dividend company.
In November 2015, Pfizer said no to that. It announced a $160 billion deal to merge with Allergan plc (NYSE:AGN), which was only paying 5 cents per share in dividends, and to move its headquarters to Ireland for tax purposes. The hope was that the combined company would deliver fat capital gains to shareholders. A change in rules from the Treasury Department forced the two companies apart last April. If the deal were presented today, it’s likely the new administration would approve it.
What investors are getting today is a company whose profit margins have been falling steadily for years, as its biggest drugs (like Lipitor) come off-patent, with a declining asset base, and with operating cash flow which, while improving lately, still represents less than 10 cents for each dollar of equity.
Pfizer, in short, looks like a very lazy company that may, or may not, pull a rabbit out of its hat and become something that it is not, which is a company you buy for capital gains. The company was expected to earn 50 cents per share but reported 47 cents.
The question remains, is Pfizer good for its dividend? Does management even want it to be a dividend stock? There are opportunities in this Dow dividend stock, but also risks — the kind an income investor learns to avoid.
Top 10 Dow Dividend Stocks for February: #1, Verizon Communications (VZ)
VZ Dividend Yield: 4.7%
The best yield among Dow dividend stocks, and one of the safest, is the 4.7% presently paid to shareholders of Verizon Communications Inc. (NYSE:VZ) — the former Baby Bell that has emerged as one of two duopolists in the mobile and Internet backbone businesses.
Verizon is the very model of a stock you buy for income. Its performance usually matches that of the market, and the dividend is regular. The company delivered 46 cents per share to shareholders at the bottom of the last recession, and now delivers almost 58 cents.
This means that when the stock becomes oversold, as the traders say, which happened last November and in September 2015, and which some say is happening right now, you buy. Then you hold and enjoy the yield.
The latest bargain time comes on an earnings miss announced Jan. 24. Traders may have been disappointed, but the $1.10 per share in income still covers the dividend almost twice over, and Verizon remains committed to maintaining the dividend. Verizon is a cash flow monster, delivering about $30 billion in operating cash flow each year. Its business model works.
Verizon buys income-producing assets and then milks profit from them. That’s why it bought the rest of its mobile arm, Verizon Communications, paying Vodafone Group PLC (ADR) (NASDAQ:VOD) $130 billion in 2014 and dramatically hiking its debt-to-assets ratio. That’s why is said to be considering a tie-up with Charter Communications, Inc. (NASDAQ:CHTR), which recently bought Time Warner Cable.
The Charter interest comes as rival AT&T Inc. (NYSE:T) moves to buy Time Warner Inc. (NYSE:TWX) to get programming to fill its delivery systems, which along with the mobile arm include wired Internet (sold under the name U-Verse) and DirecTv. Verizon’s moves in the direction of content have been more modest, buying AOL and the operating assets of Yahoo! Inc. (NASDAQ:YHOO) for Internet advertising assets.
But this is the model for an income stock. You buy assets you can make a profit on, you extract that profit as aggressively as you reasonably can, and you pay that income out to shareholders, holding just enough so you can become an acquirer again.
VZ is the very model of a high-yielding income stock.
Dana Blankenhorn is a financial and technology journalist. He is the author of the sci-fi novella Into the Cloud, available at the Amazon Kindle store. Write him at [email protected] or follow him on Twitter at @danablankenhorn. As of this writing, he did not hold a position in any of the aforementioned securities.