Distilling & Cattle Feeding Co, The American Sugar Refining Company, and the United States Rubber Company are just three of the 12 businesses Charles Dow selected to reflect the American economy on May 26, 1896. Adding up the prices of these companies and dividing them by 12, he made what is today the oldest and longest-running U.S. stock index.
Fast forward to 2021, and the index consists of 30 companies, only six of which are materials, industrials, or energy stocks. A rotation out of growth toward income and value has helped the Dow Jones Industrial Average (DJIA) outperform the S&P 500 and the Nasdaq Composite so far this year. From Warren Buffett to Cathie Wood, several popular investors own at least a few stocks in the DJIA.
A lot has changed over the past 125 years, and the DJIA looks nothing like it used to. However, many investing fundamentals haven't changed. A core objective of selecting stocks is to find quality businesses at attractive prices and let them appreciate over time. Dividend stocks provide guaranteed income to help increase the total return of an investment. Caterpillar (CAT 1.44%), Chevron (CVX 1.31%), and Procter & Gamble (PG 0.39%) are three of the Dow's top dividend stocks. Here's what makes each an excellent buy now.
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1. Caterpillar
Caterpillar is one of the world's largest manufacturers of earthmoving equipment and industrial machinery. 2021 marks the 30th anniversary of Caterpillar's inclusion in the DJIA.
Caterpillar is an old-school style DJIA component. A bellwether for the industrial sector, its performance tends to ebb and flow along with the broader economy. After a poor 2020 performance, Caterpillar is expected to stage a rebound. The issue is that its share price is trading near an all-time high before it has achieved the anticipated blow-out results.
Although management cited supply chain issues that could impede the company's ability to meet rising demand in the short term, there's no denying that Caterpillar is well positioned for an uptrend. Its growing energy and transportation division stands to benefit from increased oil and gas use in industrial production, transportation, and power generation. Higher commodity prices and demand for mining equipment to support the need for raw materials should contribute to a strong performance from Caterpillar's resources industries segment. And finally, the construction business continues to get a lift from consistent growth in China and the red-hot U.S. residential housing market. It could also benefit from a recovery in commercial real estate. Add it all up, and there's a lot to like about Caterpillar right now.
Caterpillar's tenure in the DJIA is impressive, but so is its track record for consistently increasing its payout. During its first-quarter conference call, management indicated its intentions to raise the dividend for the 27th consecutive year, which would allow Caterpillar to keep its coveted spot on the list of Dividend Aristocrats. A Dividend Aristocrat is a company in the S&P 500 that has increased its payout for at least 25 consecutive years.
2. Chevron
Chevron's 5.1% dividend yield is the highest in the DJIA. One of the newest components, Chevron was added in August 2020 to replace ExxonMobil, which was removed after a nearly 100-year tenure.
Chevron is the last remaining oil stock in the Dow. And although the energy sector is much smaller in terms of market cap than it used to be, Chevron continues to stand out as one of the more reliable companies in the space.
Chevron's first-quarter results weren't great, but marked a return to profitability and its best performance since the pandemic began. Management reiterated its emphasis on the dividend, one of the main ways Chevron intends to return value to its shareholders. The company's most recent payout of $1.34 per share marked its 34th consecutive annual increase.
Chevron's dividend focus does come at a price -- the price of growth. Chevron's capital expenditures are 40% lower than a year ago as the company prioritized its balance sheet and dividend over reinvestment. There are many high-yielding energy stocks that give preference to the dividend and growth over financial health (but they tend to be riskier). Some energy companies choose not to pay a dividend, focusing instead on growth and a strong balance sheet.
Investors can choose which dynamic is best for them. But in general, what Chevron is doing is the ideal combination for dividend investors. And given the company's size, diversified business model, and track record, there are few better ways to get a 5% yield than Chevron.
3. Procter & Gamble
The third Dividend Aristocrat on this list, Procter & Gamble is a pinnacle of dividend strength. Not only is the company one of the longest-tenured Dividend Aristocrats (having increased its payout for 65 consecutive years), it's also known to make large dividend increases and share buybacks. The company's most recent raise bumped its quarterly payout to $0.87 per share, a sizable 10% increase. Looking at the last 12 months, P&G bought back $8 billion in stock and distributed $8.1 billion in dividends to its shareholders, representing nearly all of its cash flow from operations.
PG Cash from Operations (TTM) data by YCharts
Despite returning so much cash to shareholders, P&G continues to find ways to grow its organic sales by low single digits year after year. There are many reasons for this but it's mostly due to the company's brand power, sophisticated supply chain, and benefits of scale.
The largest U.S.-based consumer staples company by market cap, P&G should be able to combat inflation by passing along rising input costs to its customers. Its business is also resilient during recessions since customer demand for its products stays roughly the same during good times and bad.
A reputable basket to round out your portfolio
Containing fewer dividend stocks than it used to, the average yield in the DJIA is now just 1.7%. Instead of purchasing a DJIA index fund, investors who buy equal parts of Caterpillar, Chevron, and P&G would enjoy an average yield of 3.1% while exposing themselves to industry-leading companies from a variety of sectors.
