When looking at potential dividend stocks, investors often compare dividend yield and a company's track record for increasing its payout. The Home Depot (HD 0.94%), Johnson & Johnson (JNJ -0.46%), and Chevron (CVX 0.37%) have both of these qualities in abundance. All three are also components of the Dow Jones Industrial Average (^DJI 0.40%).
While the structure of the Dow has its flaws, namely that it is a price-weighted index, being a member of the Dow is a badge of honor. Each Dow stock is a representative of its industry, usually because it is an industry leader or is a consistent payer.
Here's why Home Depot, J&J, and Chevron stand out as three blue chip dividend stocks that are worth buying now.
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Home Depot is a good value
Home Depot is one of the more familiar big-name dividend stocks, and is an excellent example of how a stock can be cyclical and reliable at the same time.
It's no secret that Home Depot benefits from economic growth. A boost in housing starts requires more building materials. When consumer discretionary spending is high, folks might take on that long overdue home improvement project. But when times get tough, projects are put off, people might delay buying a home, and nonessential purchases are avoided as much as possible.
The last 15 years have featured a largely uninterrupted streak of top- and bottom-line growth for Home Depot. In the last five years alone, revenue is up 74.8% and diluted earnings per share (EPS) are up 46.7%.
HD EPS diluted (TTM) data by YCharts. TTM = trailing 12 months.
Home Depot stock has been a big winner during this time. But because the earnings growth has been so good as of late, the company's valuation isn't expensive. It trades at an 18.2 price-to-earnings ratio.
On its second-quarter earnings call, management discussed a slowdown in big-ticket discretionary categories, but strength across the project-related categories of building materials, hardware, and plumbing. This is just one of the many reasons that although the company plays in cyclical industries, the business itself is more resilient and diversified than it is given credit for.
With a 2.9% dividend yield, The Home Depot is one of the higher-yielding Dow dividend stocks and is certainly worth a look now.
Johnson & Johnson's spinoff looks like a success
Johnson & Johnson stock is hovering around a 52-week low. In early May, the company spun off its consumer health business into a publicly traded company called Kenvue, whose stock is down over 20% since the spinoff and is right around its all-time low.
The simplest explanation for the poor performance of Kenvue could be its lack of growth. J&J's consumer health business has historically lagged the growth of pharmaceuticals. Now that Kenvue has been spun off, J&J becomes a much more interesting dividend growth stock.
Even without Kenvue, J&J should have no problem supporting steady dividend increases. On Aug. 30, it released financials and guidance to reflect how the business has changed since the spinoff. The August guidance was updated to exclude the consumer health business, which resulted in 16% lower sales compared to July (which included consumer health) but only 6.5% lower adjusted EPS. The exercise shows that J&J, without consumer health, is a higher-margin business.
While it's true that consumer health is an incredibly stable business that provides consistency to support dividend raises, there's an argument that J&J doesn't need consumer health to maintain its streak of raising its dividend every year for over 60 consecutive years.
The company will report its third-quarter earnings on Oct. 17. Investors should listen closely to management's comments on overall growth, how it will use the $13.2 billion in cash proceeds from the Kenvue spinoff, and the steps it will take to ensure it can continue raising the dividend year in and year out. With J&J stock up only 11.5% over the last five years, now looks like a good time for investors to take a position.
Chevron is the best oil major
In August 2020, Chevron replaced ExxonMobil as the only oil major in the Dow. Chevron earned investor confidence for its strong balance sheet and capital discipline, traits that are still on display today.
Like Home Depot, Chevron operates in a cyclical industry. But its ability to pay and raise its dividend is incredibly consistent because it is a diversified energy company and the dividend is affordable relative to how much cash it brings in. Even when oil is $50 a barrel, Chevron can still support its operations and its dividend.
During times when oil and gas prices are really low, like they were in 2020, Chevron can lean on its balance sheet to support the dividend. Generally speaking, using cash from the balance sheet or debt to pay a dividend is a red flag.
But in the case of Chevron, the company's balance sheet is in such good shape that it can easily pull the levers it needs to during a downturn. And again, this would have to be a particularly brutal downturn where oil stays below $50 a barrel for an extended period of time.
Oil and gas are a capital-intensive business. But Chevron, with its $309 billion market cap, has a total net long-term debt position of just $11.9 billion. That's a lower net long-term debt position than Home Depot or J&J, as well as other well-known safe Dow dividend stocks like Coca-Cola and Procter & Gamble.
CVX Market Cap data by YCharts
Chevron's low debt position, combined with its diversified business model, low cost of production, and the stock's 3.7% dividend yield make it worth considering now.
Three quality companies with compelling yields
Now that the 10-year risk-free Treasury rate is at 4.7%, investors should be selective with their dividend stock selections. Investing in a company with a yield comparable to the risk-free rate that features little to no growth isn't that appealing.
What separates Home Depot, Johnson & Johnson, and Chevron from other dividend stocks is that they have sizable yields at 2.9%, 3.1%, and 3.7%, respectively, compared to the S&P 500 average of just 1.5%. But they also have a lot of opportunities for growth.
Taking a percentage point or two of less yield with these stocks compared to the risk-free rate in exchange for gaining exposure to the broader economy is a worthwhile bet for investors willing to take on a bit of risk for a potentially greater reward.
