Please ensure Javascript is enabled for purposes of website accessibility

The Best Dividend Stocks on the Dow

By Anders Bylund - Apr 2, 2013 at 2:03PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Beauty may be in the eye of the beholder, but the best dividend stocks have something for everyone.

How can you find the best dividend stocks on the Dow Jones Industrial Average (^DJI 0.00%)? There are so many ways to approach the search. Some dividend stocks have large current yields. Others rise to the top with relentless payout boosts over decades. Still other dividend stocks look good because of ample headroom to raise yields in the future.

But sometimes you just hit the jackpot. A handful of Dow components combine several of these criteria to become the best dividend stocks overall. Here's my short list.

Health insurance giant UnitedHealth (UNH -4.29%) may not have the juiciest payout today, topping out at a modest 1.4%. But the payout has been increased by a compound annual growth rate of 60% over the last decade. Moreover, the company pumps just 10% of its prodigious free cash flow into dividend payments right now. That's one of the lowest cash-payout ratios on the Dow -- and one big reason why I think it's one of the blue-chip index's top dividend stocks. The room to grow payouts here is almost unlimited.

Microchip veteran Intel (INTC -4.62%) comes close to UnitedHealth's skimpy payout ratio and lofty headroom for growth, using 14.5% of its free cash to fund dividend checks. The rock-steady 17% annual dividend growth isn't far behind the insurer's.

Here's the cherry on top: Rapid changes in Intel's core markets have led to a massive sell-off of Intel shares over the last year, which in turn pushes up dividend yields. Today, Intel shares provide an astounding 4.2% yield. This top dividend stock is so strong that I bought some of it myself.

If all you really want is a massive yield right now and you're not sure that Intel will navigate the uncharted waters ahead, you can't beat the big telecoms.

AT&T (T -1.65%) boasts the largest yield on the Dow today, just above 4.8%. Verizon (VZ -0.10%) is virtually tied with Intel for second place at 4.2%. Both stocks have plenty of room to grow their payouts, with respective cash-payout ratios of 17% and 11%.

That being said, I would still rather buy Intel or UnitedHealth for a long-term income portfolio. Why don't the telecoms make the cut? Because they don't have much of a history of dividend increases. Compare and contrast them with Intel, for example:

VZ Dividend Chart

VZ Dividend data by YCharts.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Dow Jones Industrial Average (Price Return) Stock Quote
Dow Jones Industrial Average (Price Return)
$32,654.59 (0.00%) $0.00
Intel Corporation Stock Quote
Intel Corporation
$42.35 (-4.62%) $-2.05
UnitedHealth Group Incorporated Stock Quote
UnitedHealth Group Incorporated
$471.38 (-4.29%) $-21.15
Verizon Communications Inc. Stock Quote
Verizon Communications Inc.
$48.89 (-0.10%) $0.05
AT&T Inc. Stock Quote
AT&T Inc.
$20.23 (-1.65%) $0.34

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/19/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.