During down markets like the one we are going through, investors tend to gravitate more toward income stocks -- stocks that pay out high dividends.
Good dividend stocks not only pay you to own them every quarter, but they are also typically those of stable, established companies that have solid long-term track records. If you are looking for stocks from these types of companies that produce good dividends, the Dow Jones Index is not a bad place to start, considering it includes 30 blue chip companies.
Stocks that have the highest dividend yields are not always the best income stocks because some may be paying out more in dividends than they can reasonably handle -- which means they will ultimately have to cut the dividend down the road. The yield may also be inflated by a sinking stock price. This is what is called a dividend trap.
Let's take a look at the three highest-yielding dividend stocks in the Dow Jones --- Verizon Communications (VZ 0.90%), Dow Inc. (DOW 0.30%), and Intel Corp. (INTC -2.40%) to see whether or not the payouts are sustainable.
The 3 highest-yielding dividends on the Dow Jones
Verizon is, of course, a leading wireless and telecommunications provider. As of Dec. 1, it has the highest dividend yield on the Dow Jones at 6.70%. On Dec. 1, Verizon declared a quarterly dividend of $0.65 per share for the first quarter of 2023, which is the same as the previous quarter, but up from $0.64 per share a year ago. 2022 marked the 18th straight that Verizon has increased its annual dividend, as it paid out $2.57 per share in dividends for the year.
Is the 6.7% yield too good to be true? It looks as though Verizon should be able to sustain its payout based on a couple of factors. Its payout ratio -- which is the percentage of earnings that go to the dividend -- is 48.6%, which is a little on the high side, but it should be sustainable. That's because the company generates lots of free cash flow and has a plan to reduce expenses to pay down some of its debt. In addition, it has been growing revenue and adding customers and has a growth opportunity in expanding its 5G coverage. The stock is also very cheap, trading at just 7.5 times forward earnings.
The stock with the second-highest dividend yield on the Dow Jones is Dow Inc., the chemical company and manufacturer of plastics and other materials.
Dow has a dividend yield of 5.49% with a quarterly payout of $0.70 per share -- an amount it has maintained since 2019, when it spun off from DowDuPont, now DuPont De Nemours. It also has a manageable payout ratio of 35%. While it just spun off a few years ago, the company has been around for more than 100 years and is literally a household name, with many products that are probably in your household right now. It has been hurt by the global economic slowdown, but this is a company that has been around through various cycles, and it's not going anywhere.
I'm not sure this is a stock that will produce much long-term capital appreciation, but Dow does have a steady dividend. However, it has not raised that dividend in three years.
Finally, there's Intel, the world's leading manufacturer of semiconductor computer chips. Intel pays out a yield of 4.86% with a current quarterly dividend of $0.37 per share. This year, it has maintained that $0.37 through all four quarters for an annual payout of $1.48 per share. It has raised its annual dividend every year since 2014.
Intel currently has a payout ratio of 50.8%, which is significantly higher than it has been in recent years. That is due to the fact that revenue and earnings have dropped significantly, as has the stock price, down about 42% year to date.
Intel is the leading chipmaker in the world, but it has been losing market share. In 2022, it is projecting a 19% to 20% decrease in revenue compared to the previous year, and it faces an uncertain period where there is the potential for a recession or economic slowdown, as well as the prospect of continued supply chain issues to hurt demand. This could all lead to continued earnings headwinds.
The verdict
Of these three current yield leaders on the Dow Jones index, your best bet for a good sustained high-yielding dividend stock is Verizon.
It may not maintain that massive yield it has now, as earnings come back, but it has the type of cash flow and growth opportunities to keep increasing its dividend, as it has for the past 18 years.
The other two have their issues and challenges that make them less appealing as income generators. You could probably find some better options elsewhere on the Dow Jones.
