The Dow Gets Its Edge From Dividends

The Dow Jones Industrials (DJINDICES: ^DJI  )  closed Monday trading up just five points as positive economic data were just barely able to overcome the potential negative impact of escalating trouble in Iraq. Crude-oil prices also didn't move much despite the ongoing uncertainty in the Middle East, as investors tried to assess the likelihood of further problems that could eventually draw the U.S. back into the region with a military presence. Yet in times of trouble, one edge that the Dow Jones Industrials have over the broader market is an emphasis on paying healthy dividends, with companies that have sustained payments through thick and thin.

An edge on dividends
The Dow Jones Industrials pay much higher dividend yields than any of the major broad-market benchmarks, with an overall average of 2.2%. The S&P 500 (SNPINDEX: ^GSPC  ) comes closest to the Dow at 1.94%, but small-cap stocks and the tech-heavy Nasdaq 100 both lag well behind in the 1.3% to 1.5% range.

There are a couple ways in which the Dow excels at dividend investing. One is that all 30 Dow components pay dividends, with all but a very few making meaningful payments relative to their share price. Dow stocks don't just pay lip service to returning capital to shareholders; they put their money where their mouths are with regular payments.

Even more important than the Dow's consistency in paying dividends is its consistency in raising them. Nine of the Dow's 30 stocks are members of the Dividend Aristocrats, which have paid increasing dividends in 25 or more consecutive years. Three of these have broken the half-century mark with their annual payout raises. Moreover, none of the nine index's Dividend Aristocrats have achieved that record simply by making minuscule increases that leave their yields wanting; all have dividend yields that exceed the Dow's overall average.

Dividends with a growth kicker
Historically, some investors have moved away from the Dow Jones Industrials because of the perception that the index was full of slow-growth companies in mature industries without much future potential. To a limited extent, that's a valid concern, as the Dow does have the cream of the crop of most industries. That makes it harder for those giants to sustain growth rates similar to what they enjoyed when they were smaller businesses.

For most investors who are concerned with safety, though, the benefits of the Dow's dividend stocks outweigh their shortcomings. Many of these blue-chip stocks still have ample growth opportunities, especially as international markets open up new opportunities to expand their businesses around the world. Even to the extent that some Dow companies are in slow-growth mode, the protection such stocks can provide during market downturns gives the average a competitive advantage over more aggressive stock benchmarks at critical high-risk times.

There are plenty of reasons to follow the Dow Jones Industrials, but dividends are one of the most important. Whether you need the income now or just want the business stability that solid dividends carry, the Dow has much of what dividend investors like to see.