3 Dividend Stocks That Rule the Dow

Where did all the income go, folks? It's certainly a fair question for those investors traditionally used to relying on fixed-income products (bonds, certificates of deposit, and the like) to produce steady streams to either grow one's savings or to fund a retirement lifestyle. The current interest rate environment puts such savers or consumers between a rock and a hard place -- and shows no signs of abating anytime soon.

In an effort to provide unprecedented transparency, Federal Reserve Chairman Ben Bernanke has been abundantly clear about the near- and medium-term plan for interest rates, which on balance is probably a net positive for the various constituencies involved. However, knowing that interest rates will likely remain around historical lows well into the future makes life hard for savers. And while investing in stocks certainly carries some additional risks that investors always need to remain cognizant of, some dividend stalwarts do exist that can help supplement investors with much sought-after income.

The who's who
In that spirit, let's examine three specific components of the Dow Jones Industrial Average (INDEX: ^DJI  ) that I think exhibit some key characteristics retirement savers need to consider: size, current yield, dividend growth, and cheapness.

Company

Dividend Yield

Payout Ratio

10-Year Average Annual Dividend Growth

Number of Consecutive Annual Dividend Increases

P/E Ratio

Dow Jones Average

2.7%

35.3%

7.8%

N/A

17.1

AT&T (NYSE: T  )

3.9%

257.9%

5.4%

28

45.4

Coca-Cola (NYSE: KO  )

2.8%

50.2%

N/A

49

12.5

Procter & Gamble (NYSE: PG  )

3.3%

5.9%

10.9%

55

18.7

Source: S&P Capital IQ.

Individually, these companies have established core businesses in markets that they either dominate or occupy a significant share of their core markets. AT&T shares an effective duopoly with dividend dynamo Verizon Communications (NYSE: VZ  ) , a dynamic that appears firmly in place going forward. Because of their size and the massive advantage that size provides in telecom, these companies are both in great shape in terms of market ownership, especially in the mobile market that should drive the future of telecommunications.

Likewise, Coca-Cola also holds one of the most impressive moats in all of business, a trait that the Oracle of Omaha himself loves about the company. Besides having the most valuable brand in the world according to Interbrand, the company also has a vertically integrated distribution network that's the envy of other consumer goods companies. Consider this: Coca-Cola's distribution network is so robust that other consumer goods companies have to use Coke's network in order to get their products to market... not too shabby.

With one of the strongest product portfolios on Earth, P&G also absolutely dominates the household products arena. Running the gamut from personal hygiene to dish soap, it's a relatively safe bet that you have several P&G products whether you realize it. How much do you think a competitor would need to spend in order to erode the brand value of such tried-and-true names like Gillette, Olay, Downy, or Duracell? My guess isn't a pretty penny.

Foolish bottom line
Savers looking more into stocks as a means of increasing income would do well to look at the kinds of companies mentioned above -- large, competitively entrenched, and with long histories of rewarding their shareholders. While not perfect, these kinds of stocks stand the best chance of giving your diversified portfolio (a must for all retirement savers) the much-needed cash flows it needs.

And while these large Dow dividends are great, they sometimes lack the explosive potential of smaller companies that can make for a different segment of your portfolio. If you're looking for something more, The Motley Fool recently composed a research report detailing its top stock for 2012. Better yet, we made it absolutely free to our readers, so access your free copy while you still can.

Andrew Tonner held no financial position in any of the companies mentioned in this article. The Motley Fool owns shares of Coca-Cola. Motley Fool newsletter services have recommended buying shares of Procter & Gamble and Coca-Cola. 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.


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