It's already been a pretty good year for two of America's three main market indexes. Enthusiasm for growth stocks already pushed the Nasdaq Composite and S&P 500 indexes more than 6% higher since the start of 2024.
Unfortunately, the Dow Jones Industrial Average hasn't kept pace with its larger cousins. It's up by less than 1.5% this year, and some of its components appear underappreciated.
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Before assuming the Dow Jones Industrial Average is full of losers, it's important to understand it's a price-weighted index. When Walmart, one of its components, enacted a three-for-one stock split in February, the big box retailer's contribution to the Dow Jones index immediately decreased by two-thirds. Walmart's market value didn't change in the blink of an eye -- just the stock price and number of shares outstanding.
The Dow Jones Industrial Average is deeply flawed, but it has a redeeming feature. Stocks aren't added to the list unless their underlying businesses have already shown an ability to generate profits on a recurring basis.
Here's a look at two reliably profitable businesses in the Dow Jones Industrial Average index that could continue raising their dividend payouts for many years to come.
Verizon
Verizon (VZ -0.22%) is the largest member of America's three-way telecommunications oligopoly. At recent prices, its stock offers an eye-popping 6.7% dividend yield.
The company announced its 17th consecutive annual-payout raise last September. Unfortunately for Verizon's long-term shareholders, those raises haven't been very big. The mobile and broadband internet service provider's payout has only risen by 10.4% over the past five years.
Shares of Verizon have been trading for about 8.7 times trailing free cash flow. That is a tempting price to pay for a reliably profitable industry leader. Even if profits stagnate, the business will generate about $11.49 annually in cash available to reinvest, make dividend payments, repurchase shares, or reduce its debt load for every $100 invested at recent prices.
Before loading up on Verizon stock, investors should know its existing dividend commitment chewed through 82% of the free cash flow that operations generated over the past 12 months. That doesn't leave much room for reinvestment or reduction of its enormous debt load.
Verizon's high yield and low valuation are tempting. A combination of slowing growth and a high debt load, though, make it a stock to avoid if you want rapidly growing dividend payouts.
American Express
With shares that offer a paltry 1.2% dividend yield at recent prices, American Express (AXP 0.50%) doesn't light up radar screens for most income-seeking investors. Younger folks with plenty of time to let payouts grow might want to consider adding it to their portfolio anyway.
American Express has raised its dividend payout by 63% since the end of 2021, and there's all kinds of room for more big payout bumps. The company used less than 8% of the $22.9 billion in free cash flow it generated over the past year to meet its dividend commitment.
American Express owns one of the world's four main credit card networks. Unlike Visa and Mastercard, American Express acts as its own bank. Instead of just earning swipe fees that can be unpredictable during economic downturns, it also receives heaps of interest payments and annual fees.
Of course, American Express is also sensitive to the overall state of credit quality, which has not been so great lately. The Federal Reserve measured credit card delinquencies across all U.S. banks at 3.1% in the fourth quarter of 2023. That's a higher national credit card delinquency rate than we've seen since 2011.
Credit quality isn't a huge problem for American Express because it's famously selective about its borrowers. As a result, just 1.3% of total card-member loans were considered delinquent at the end of March. That's less than half the national rate.
American Express shares have been trading for about 18.3 times trailing earnings. This is a fair price to pay for shares of a company that raised earnings per share by more than 50% over the past five years. Adding the stock to a portfolio now to hold over the long run looks like a smart move.
