These Dow Dividend Laggards Have Room for Improvement

Investors should expect better payouts from these three stocks in the future.

May 11, 2014 at 9:05AM

Dividend investors count on the Dow Jones Industrials (DJINDICES:^DJI) to provide them with solid, dependable income, and the best Dow dividend stocks have delivered not only regular payouts but also dividend growth over the past decade. Yet amid the 30 stocks of the Dow Jones Industrials, some dividend laggards haven't done as good a job in producing more income for their shareholders. Let's take a look at General Electric (NYSE:GE), Merck (NYSE:MRK), and DuPont (NYSE:DD) and see how they could improve their status among dividend investors.


Source: General Electric.

Of these three Dow components, General Electric is the only one that has had to make a dividend cut. That reduction came in the aftermath of the financial crisis, as it became clear that General Electric wouldn't be able to keep paying money to shareholders and shore up its capital position at the same time. The cut of more than two-thirds in General Electric's dividend shattered the confidence of income investors, and combined with the dramatic cuts that many financial stocks made at the time, the Dow suffered greatly from doubts about its ability to keep delivering dependable dividends. Since that cut, though, General Electric's dividend has been on the recovery path, using the company's success in the energy and aerospace fields and more than doubling its payout since mid-2009. Nevertheless, with General Electric only having caught up with its dividend level as of late 2004, shareholders will want to see further success as General Electric deemphasizes its financial business and returns to its core industrial roots.

Mrk Vaccine

Source: Merck.

Merck, on the other hand, hasn't cut its dividend, but it has also raised it only four times in the past decade, and three of those increases were stingy $0.01 per share quarterly boosts. A couple of factors have kept Merck from sending its payout higher. In 2005, Merck chose to give up its status as a Dividend Aristocrat and not make an increase in its dividend for the first time in 34 years, with massive liability from lawsuits about its painkiller drug Vioxx eventually leading to multibillion-dollar settlements. After that, Merck's buyout of Schering-Plough, the financial crisis, and patent-cliff concerns likely deterred it from raising its payout, and even now, Merck is conserving money by making minimal dividend increases. Now that Merck has sold off its consumer-care segment for $14 billion, though, the big question is whether shareholders will share in that bounty through higher payouts.


Source: DuPont.

DuPont has also been slow to make dividend boosts, also making only four increases since 2004. One issue that DuPont has faced is that its business segments have had widely disparate performance, with agricultural products having fared extremely well but its more traditional chemicals business having faced sluggish economic conditions and challenges in keeping profit margins wide enough to justify focusing on the segment. In response, DuPont has been moving toward focusing more on the agricultural side, with efforts to sell or spin off underperforming divisions to concentrate on its greatest profit opportunities. As long as the ag industry stays strong enough to afford yield-enhancing products, DuPont has the potential to make future boosts in its payout in the years to come.

With yields of 3.4% for General Electric, 3.1% for Merck, and 2.7% for DuPont, it's hard to find too much fault with these three Dow Jones Industrials components. But investors still want to see dividend growth, and hopefully, these three Dow stocks will be able to give shareholders what they want in the near future.

Top dividend stocks for the next decade
The smartest investors know that dividend stocks simply crush their non-dividend paying counterparts over the long term. That's beyond dispute. They also know that a well-constructed dividend portfolio creates wealth steadily, while still allowing you to sleep like a baby. Knowing how valuable such a portfolio might be, our top analysts put together a report on a group of high-yielding stocks that should be in any income investor's portfolio. To see our free report on these stocks, just click here now.

Dan Caplinger and The Motley Fool own shares of General Electric. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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