The Dow Jones Industrial Average is home to 30 blue chip companies -- many of which pay dividends. Dow components Microsoft and Apple may not have the highest yields, but they are so massive that they have some of the highest dividend expenses among U.S.-based companies.
JPMorgan Chase (JPM 0.30%), UnitedHealth Group (UNH +0.53%), and Home Depot (HD 2.39%) are three industry-leading Dow components that paid a combined $29 billion in dividends over the last year. For context, that's roughly the entire market cap of companies like Zscaler, Cloudflare, Pinterest, Delta Air Lines, and Halliburton.
Here's why all three stocks are worth buying now.
Image source: Getty Images.
A key metric shows why JPMorgan Chase is at the top of its game
JPMorgan Chase has been the best-performing of the four largest U.S. banks over the last year, three years, five years, and 10 years. And there's plenty of reason to believe its dominance will continue.
JPMorgan consistently manages capital well -- as evidenced by its industry-leading return on equity (ROE). ROE is net income divided by shareholders' equity. The higher the ROE, the greater the effectiveness of generating net income from existing assets. For bank stocks, an ROE over 10% is generally considered good. For over five years, JPMorgan's ROE has been higher than its peers and currently sits at 15.8%.
JPM Return on Equity data by YCharts
A higher ROE helps justify a higher valuation. JPMorgan Chase has a price-to-book ratio of 1.9 compared to 1.3 for Wells Fargo, 1.2 for Bank of America, and 0.6 for Citigroup. Investing is all about trade-offs. So while JPMorgan is the highest-quality bank, it is also the most expensive. Investors who don't mind paying up for quality may still prefer JPMorgan over alternatives.
In late June, JPMorgan raised its dividend to $1.25 per share per quarter -- giving it a forward yield of 2.4%. That may not sound like much, but the stock has nearly doubled in value in the last two years, bringing the yield down. However, investors would much prefer sizable capital gains than a percentage point or two difference in yield.
JPMorgan stock isn't as cheap as it used to be, but it arguably deserves a higher valuation than its peers. Over the last year, JPMorgan paid $13.6 billion in dividends, the third-highest dividend expense of the Dow components behind Microsoft and Apple.
MSFT Total Dividends Paid (TTM) data by YCharts
UnitedHealth continues to deliver for patient investors
Insurance provider UnitedHealth has produced a 113% total return over the last five years and trades up over seven-fold over the last decade, while drugmaker Eli Lilly stock is up a mind-numbing 772%. Both companies have helped drive big gains in the healthcare sector, which is now the third-largest sector in the S&P 500 behind tech and financials.
There are plenty of ways to invest in the healthcare sector. A company like UnitedHealth is a bet on increased healthcare spending, whereas drugmakers are far riskier and can boom and bust based on federal approvals, the duration of patents, and competition. There are also medical device manufacturers, biotech companies, and more.
UnitedHealth is a classic example of a boring business that is an exciting stock. It uses the dividend as a key way to pass along profits to investors.
UnitedHealth began paying annual dividends in 1990, but switched to a quarterly dividend in June 2010. At the time, its quarterly dividend was $0.125 per share. Today, the quarterly dividend is a whopping $2.10 per share -- a more than 16-fold increase over 14 years. Although the big raises came in the early 2010s, UnitedHealth is still growing its dividend faster than the typical stodgy dividend stock. Its payout has more than doubled over the last five years.
Granted, UnitedHealth's yield is only 1.7%. But like JPMorgan, the low yield is due to a strong stock performance rather than a lack of raises. With a forward price-to-earnings (P/E) ratio of just 17.6, UnitedHealth stands out as an inexpensive, high-quality stock to buy now.
Home Depot pays investors to hold through volatility
Like UnitedHealth, Home Depot makes consistent and sizable dividend raises. Its most recent 7.7% increase to $2.25 per share per quarter marked the company's 148th consecutive quarter it has paid a dividend. Home Depot's dividend is now up 379% over the last decade. The stock's dividend generates a yield of 2.7%.
Home Depot shares have been under pressure due to myriad macroeconomic factors, including weakening consumer spending, a challenged housing market, high outstanding consumer credit card debt, relatively expensive residential home prices, and high mortgage interest rates.
At times like this, it is important to remember that Home Depot has the qualities of both a cyclical and a consumer staples business. Business can really boom when home sales volume is high and consumers are spending money on renovations and improvements. But even when there's a slowdown, Home Depot can still do very well. For example, its fiscal 2024 guidance calls for essentially flat sales and earnings-per-share growth compared to fiscal 2023. So it's not like Home Depot is expecting a serious decline.
There's a big difference between a cyclical business whose profits boom and bust, and one like Home Depot where a downturn looks more like no growth rather than negative growth. Renters and homeowners alike go to Home Depot for the tools and materials they need for variety of do-it-yourself projects that have nothing to do with the housing market. What's more, Home Depot has been expanding its business to try and boost sales to contractors, which should help diversify its revenue mix.
Home Depot has a forward P/E ratio of just 21.9. Given its industry-leading brand and solid yield, it stands out as an excellent blue chip dividend stock to buy while it is out of favor.
Good stocks to have in your corner during a sell-off
Buying blue chip dividend stocks on sale is a great way to steer your portfolio toward quality and boost your passive income stream. Dividends may not seem that impressive when the major indexes are putting up monster gains. But when corrections or bear markets occur, dividends can provide a stream of income without the need to sell stock, which can serve as dry powder to buy quality growth stocks on sale.
JPMorgan Chase, UnitedHealth, and Home Depot may not be the flashiest companies, but all three stocks have reasonable valuations and a track record of dividend growth. Investors looking to take some risk off the table or simply put new capital to work in the market without buying top growth stocks at all-time highs should consider JPMorgan Chase, UnitedHealth, and Home Depot as worthwhile candidates to buy and hold for at least three to five years.
