The Dow's Top 10 Dividend Stocks

A couple months ago, I wrote a column about the Dow's two best dividend-paying stocks. It was so popular that I decided to expand the list to 10. In the present column, I've accordingly selected and ranked what are arguably the Dow's 10 best dividend-paying stocks.

My selection and ranking criteria
I selected the companies to rank by screening for the Dow's 10 best-yielding stocks:

Company

Dividend Yield

AT&T (NYSE: T  ) 5.89%
Verizon Communications 5.37%
Merck (NYSE: MRK  ) 4.64%
Pfizer (NYSE: PFE  ) 4.23%
DuPont (NYSE: DD  ) 3.66%
General Electric (NYSE: GE  ) 3.63%
Intel (Nasdaq: INTC  ) 3.57%
Johnson & Johnson (NYSE: JNJ  ) 3.54%
Kraft Foods 3.28%
Travelers 3.24%

Source: Yahoo! Finance (as of Oct. 17, 2011).

I then ranked and scored them according to sustainability, predictability, and general quality:

  • As a proxy for sustainability and growth potential, I looked at the dividend's size relative to free cash flow per share.
  • As a proxy for predictability, I looked at when the company started paying a dividend.
  • And as a proxy for overall quality, I looked at the companies' CAPS scores, our free service that pools the resources of the Motley Fool community to help investors differentiate between the market's best and worst stocks. Because CAPS scores go from one to five, however, I doubled each company's number to normalize it with the other categories.

I then added up the points and ranked the companies accordingly:

Company

FCF Payout Ratio (Points)

Year Started Paying Dividends (Points)

Caps Rating (Points)

Total Points

General Electric 26% (10) 1899 (9) 4 (8) 27
Pfizer 28% (8) 1939 (6) 4 (8) 22
Johnson & Johnson 48% (5) 1944 (5) 5 (10) 20
DuPont 59% (3) 1904 (8) 4 (8) 19
Merck 52% (4) 1935 (7) 4 (8) 19
Travelers 27% (9) 1990 (3) 3 (6) 18
AT&T 70% (2) 1881 (10) 3 (6) 18
Verizon Communications 47% (6) 1984 (4) 4 (8) 18
Intel 43% (7) 1992 (2) 4 (8) 17
Kraft Foods 131% (1) 2001 (1) 4 (8) 10

Source: S&P Capital IQ, DividendInvestor.com, and Motley Fool CAPS (as of Oct. 13, 2011). FCF payout ratio uses operating cash flow less capital expenditures as measure of free cash flow.

The Dow's top dividend-paying stocks
The companies that made this list aren't strangers to income-seeking investors.

General Electric and DuPont, for example, have paid quarterly dividends without fail for over 100 years each. And AT&T and Verizon currently pay the highest dividend yield on the index.

If the past and present are any indication of the future, in turn, then income-seeking investors would be well-advised to consider adding some or all of these stocks to their portfolios for the long run.

Foolish bottom line
While exercises like this can help you identify interesting investment ideas, you should never make a decision before researching the company itself. Ask yourself questions like: Do you trust the company's management and board of directors? Or, do you think the demand for its services and/or products will grow in the future?

In the meantime, if you're looking for ideas about where to find great dividends, I urge you to read our free report about 13 high-yielding dividend stocks. It profiles companies in a variety of sectors that are padding the pockets of income-seeking investors. To access it while it's still free and available, click here.

Editor's note: A previous version of this article used erroneous free cash flow information. We regret the error.

Fool contributor John Maxfield, J.D., does not have a financial position in any of the companies mentioned in this article. The Motley Fool owns shares of Johnson & Johnson and Intel. Motley Fool newsletter services have recommended buying shares of Intel, Johnson & Johnson, AT&T, and Pfizer, as well as creating diagonal call positions in Intel and Johnson & Johnson. 

Try any of our Foolish newsletter services free for 30 days. We Fools may not 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.


Read/Post Comments (3) | Recommend This Article (17)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 18, 2011, at 2:59 PM, Fool wrote:

    John - great article, but I'd suggest incorporating a fourth metric related to the increase/decrease of the dividend over the past five (at least) years .

    GE looks great when you consider that it has paid a dividend since 1899. However, its Capital group gave it increased exposure to the financial crisis, which resulted in a dividend that is roughly 1/3 of what it used to be ($0.46 last year, compared to $1.24 in 2008).

    As such, I wouldn't touch the stock with a 10 foot pole these days.

  • Report this Comment On October 18, 2011, at 11:33 PM, daodell33 wrote:

    I have some constructive criticism.

    The metrics you've used are hit and miss. For example, the year a company started paying dividends is irrelevant to predictability. . .though your intent is there. Let's boil down what you intended to measure and rightfully so . . . in a round about way you are attempting to measure a companies ability to pay dividends, (future) willingness to pay dividends, and current valuation vs future valuation where the gap between ability and willingness, current and future (perceived and real) valuation create opportunity. This makes sense: Stock price = dividend + Future growth opportunity.

    Some appropriate measurements of ability to pay dividends: payout ratios are a good choice though Intel's dividend payout ratio (based on FCF) looks off, perhaps I'm wrong, can you help me understand your calculation.

    Willingness to pay and future willingness to pay dividends can be both qualitative and quantitative. Though, year started dividends is just not indicative of the future. Some appropriate metrics: current yield, 1, 5 and 10 year dividend growth, recent management comments regarding dividends - essentially estimate the future payout ratio and determine if there is a gap with current payout ratio.

    Current valuation and future growth: PE, PEG, FCF Growth

    I think the article and audience would be better served by dividing your metrics in categories that lead back to gaps in current and future dividend payments and valuations then using your 10 point system. You'll find a different but more appropriate evaluation for gain.

    John, please help me with your Dividend to FCF payout ratio, use Intel and highlight the source and year of your information -thx.

  • Report this Comment On October 19, 2011, at 1:42 PM, JohnMaxfield37 wrote:

    daodell33 -

    Thanks for the great ideas. Much appreciated!

    Yeah, I caught the FCF discrepency last night after publication and similarly after our eds went home for the evening. You'll see the updated figures are now included.

    John

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