The Dow Jones Industrial Average (INDEX: ^DJI ) has come a long way since its start late in the 19th century. Heavy industrial companies have made way for technology and oil companies. The 30-company index is often used as a gauge of the U.S. economy as a whole, often in tandem with the S&P 500. But unlike the S&P 500, all 30 component companies of the Dow currently pay a dividend, from top yielder AT&T to nominal dividend payer Bank of America.
The Dow Jones publishes a list of the 10 highest-yielding companies in the Dow every year, fittingly called The Dow 10. But among the other 20 companies that get left out, many have plenty of room to increase their dividends:
Annual Dividend per Share
|Alcoa (NYSE: AA )
|Hewlett-Packard (NYSE: HPQ )
|Cisco (Nasdaq: CSCO )
|ExxonMobil (NYSE: XOM )
Sources: Finviz.com and author calculations.
Low payout = high potential
The two companies with the lowest payout ratios are also two stocks that I think shouldn't be on the Dow. But if either Alcoa or Hewlett-Packard decided to increase its current dividend, I think I could stomach keeping them on the Dow for a bit longer. Alcoa's dividend has been stuck at $0.03 a quarter since 2009, after a drastic cut from $0.17 per quarter. Increasing the dividend to $0.05 each quarter going forward wouldn't break the bank, and the stock's yield, at current prices, would rise above 2%.
Hewlett-Packard, as opposed to Alcoa, recently raised its quarterly dividend after paying the same $0.08 per quarter for more than a decade. It still has plenty of room to grow based on its low payout ratio, even with PC shipments falling. Increasing the dividend slightly will still leave the technology company plenty of cash to search for its next big thing, while simultaneously keeping investors happy.
American Express is another company that appears stuck in a rut of paying the same dividend, having kept its dividend at the same level since January 2008. With competitor Visa recently raising its own quarterly dividend 47% to $0.22 a share, American Express should seek to keep pace. The same increase for American Express would boost its dividend to $0.26 a quarter, which would still produce a payout ratio of only 27%.
New dividends can grow, too
Cisco has just completed its first year as a dividend-paying company, so it will be interesting to see whether it maintains the status quo going forward or whether it starts to increase its dividend this year. Analysts are bullish on Cisco's prospects this fiscal year, predicting $1.77 per share in earnings, a 50% increase over earnings from the past 12 months. To reach the dividend level that technology competitor Microsoft pays, Cisco would have to increase its dividend by 128%. While Mr. Softy's current yield could be a long-term target, a more modest $0.02-per-quarter increase would push the yield over 2% and still leave plenty of room for future growth.
Big Oil should mean big dividends
In my opinion, a company as large as ExxonMobil should be paying a bit more of its earnings as dividends. Fellow oil company and Dow compatriot Chevron yields above 3%, with a slightly higher 24% payout. ExxonMobil does have a history of increasing its dividend every year, having done so for the past 28 years. While the company has not yet indicated that it plans to stop, it would be nice to see an increase slightly larger than the 7% increase last year.
Not all dividends are created equally
While I don't expect every dividend-paying company to pay out a majority of its earnings as dividends, it sure is a lot nicer when they do. When they are paying out less than 25% of earnings as dividends, it makes me take a second look.
Companies included on the Dow Jones are some of the last "blue-chip" stocks that we have, so when they pay higher dividends, I notice. Despite its low payout ratio, one of the companies I mentioned here is included in our special free report, "Secure Your Future with 11 Rock-Solid Dividend Stocks." To find out which one made the cut, get your copy.