Most of the 30 companies that make up the Dow Jones Industrials (DJINDICES:^DJI) pay healthy dividends. But for those who follow one popular strategy, only the highest-yielding Dow stocks make the cut -- and with just six weeks left in the year, it look as though 2014 could bring some big changes.
The strategy that many follow is known as the Dogs of the Dow and concentrates on the 10 top-yielding Dow stocks as of Dec. 31. At the risk of jumping the gun, let's take a look at how Chevron (NYSE:CVX), Cisco Systems (NASDAQ:CSCO), and Caterpillar (NYSE:CAT) could end up on the list, and whether they'd make smart investments if they do.
3 Cs coming in
For Chevron, the interesting thing about the oil giant is that its yield hasn't budged since the beginning of the year. The stock has risen 11%, but Chevron announced a similarly sized dividend increase earlier in the year, keeping its yield unchanged.
So why could Chevron join the Dogs? The key is that with the overall Dow up sharply for the year, most of the current Dow Dogs have seen their share prices rise faster than their dividend payouts, reducing their yields. At the beginning of the year, 13 Dow stocks paid more than 3% yields, but now, only seven do. That puts Chevron, which has demonstrated a tenacious ability to boost its oil and gas production despite the challenges that its size presents, in a strong position to grow its dividend further and be a worthy dividend-stock contender in 2014.
Cisco and Caterpillar, on the other hand, have put themselves in contention because of the poor performance of their shares. Cisco has risen less than 10% this year, and a sizable dividend increase of its own has pushed its dividend yield up to almost 3.2%. Its poor earnings report last week helped send its shares plunging and its yield soaring, and some would argue that its projection of much weaker revenue in the current quarter makes it a poor investment prospect, at least in the short run. For longer-term investors, the main question remains whether Cisco can use its networking prowess to create a broader-reaching tech-services empire or whether it will fall prey to strong competition from its peers.
Caterpillar is one of just two Dow stocks to lose ground this year, and that has sent its yield up the most of any Dow stock, rising more than half a percentage point. The company has seen huge pressure both from lagging economic activity that has discouraged purchases of its construction equipment as well as from the plunge in commodity prices that have affected Caterpillar's mining-equipment demand. The only good news is that the entire industry is feeling similar pain, and any eventual cyclical rebound should help the stock recover -- albeit not necessarily even in 2014. Right now, Caterpillar stands No. 11 on the dividend-yield list, but with the likelihood of an end-of-year rally leaving the construction giant behind, Caterpillar stands a good chance of making the top 10 by year's end.
Fool contributor Dan Caplinger has no position in any stocks mentioned. You can follow him on Twitter: @DanCaplinger. The Motley Fool recommends Chevron and Cisco Systems. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.