The Dow Jones Industrial Average (DJINDICES: ^DJI) has 30 industry-leading components that act as representatives of the U.S. economy. The index’s wealthy history has made it a go-to destination for investors on the lookout for quality names that may help them generate dividend income.
Over time, the composition of the Dow has modified to reflect the growing influence of technology on the economy, which has helped the Dow produce impressive gains lately. But even stodgy Dow names like Coca-Cola, Home Depot, and McDonald’s have been roaring higher in recent months and helped the index achieve a fresh all-time high on Oct. 11.
Despite the Dow’s track record, not every component has a high yield or has been a trustworthy dividend stock. Boeing‘s slew of challenges pressured the corporate to suspend its dividend. Tech stocks like Microsoft, Apple, and Salesforce have yields under 1%, and Amazon doesn’t pay dividends.
Johnson & Johnson (NYSE: JNJ), Dow (NYSE: DOW), and Chevron (NYSE: CVX) are three of the highest-yielding stocks within the index. Investing $2,500 into each stock produces a median yield of 4.2% and may generate no less than $300 in passive income per yr. Here’s why all three dividend stocks are price buying now.
J&J has handled significant challenges over the previous few years
Johnson & Johnson (J&J) is a Dividend King with 62 consecutive years of dividend increases. The corporate has long been referred to as a stodgy passive-income powerhouse. But the previous few years have been difficult, as reflected in its languishing stock price.
J&J was a frontrunner in COVID-19 vaccine developments, which was initially a boon for the corporate. But rapidly declining demand for the vaccine has been a drag on the corporate to the purpose where J&J now reports lots of its results as “excluding the impact of the COVID-19 vaccine.”
One other challenge has been adjusting to the spinoff of J&J’s consumer health business, which occurred in August 2023. Former J&J brands, similar to Band-Aid and Tylenol, are actually under the brand new entity Kenvue. The spinoff should help J&J be a faster-growing company by specializing in just two segments — Revolutionary Medicine and MedTech. Nonetheless, it does remove a few of the secure and stodgy parts of the business that made J&J a rock-solid dividend stock, irrespective of the economic cycle.
Finally, J&J has been coping with lawsuits that allege its talc-based products led to cancer development. J&J restructured and made a subsidiary called Red River Talc LLC, which filed for Chapter 11 bankruptcy on Sept. 20 to handle current and future claims.
After a messy few years, J&J is finally able to turn the corner. The business has been putting up solid results and growing at a rate that ought to support good, if not excellent, dividend raises going forward. J&J generates a ton of free money flow that easily covers its dividend expense. And with a yield of three.1%, J&J stands out in comparison with the S&P 500 dividend yield of just 1.2%.
Dow is a coiled spring for economic growth
To not be confused with the “Dow” within the Dow Jones Industrial Average, Dow makes chemicals utilized in plastics, seals, foams, gels, adhesives, resins, coatings, and more. The commodity chemical company has three key segments — Packaging & Specialty Plastics, Industrial Intermediates & Infrastructure, and Performance Materials & Coatings.
Dow’s business model is capital intensive and vulnerable to ebbs and flows in global demand and provide. Dow has been hit hard by volume declines and lower margins. In the next chart, you’ll be able to see that revenue and margins surged in 2021 and early 2022 but have fallen considerably since then. Similarly, the stock price has gone practically nowhere because the spinoff.
Dow has blamed macroeconomic aspects as a key reason for its weak results. Nonetheless, low rates of interest could greatly profit most of the company’s end markets. For instance, lower mortgage rates of interest could boost housing demand, which might help Dow’s polyurethanes and construction chemicals business. Lower rates of interest could also boost demand for durable goods.
Overall, Dow is well positioned to see a large uptick in earnings next yr. Analyst consensus estimates call for just $2.26 in earnings per share (EPS) in 2024 but $3.55 in 2025 EPS. Although Dow looks expensive based on trailing earnings, it will have a way more reasonable valuation if it delivers on expectations.
Despite the volatility of Dow’s performance, it has proven to be a reliable income stock spinning off from DowDuPont in 2019. Dow yields 5.2%, making it the second-highest yielding stock within the Dow Jones, behind only Verizon Communications. Dow hasn’t raised its payout because the spinoff, however it has incorporated stock repurchases as a part of its capital return program. The corporate’s goal is to return 65% of earnings to shareholders through buybacks and dividends so it has enough dry powder to fund long-term investments in latest production plans, low-carbon efforts, and more.
Overall, Dow is value stock for income investors to think about now.
A high quality energy stock with a high yield
Like Dow, Chevron could be a highly cyclical business whose results are heavily impacted by commodity prices. But Chevron has a robust balance sheet, a diversified upstream business that does not depend upon one production region, an enormous refining business, and a track record for raising its dividend irrespective of what oil prices are doing.
In truth, Chevron has paid and raised its dividend for 37 consecutive years. Chevron yields 4.3%, which is the third-highest yield within the Dow Jones. The corporate’s track record for dividend raises, paired with its high yield, makes it arguably the one best passive income play out of the 30 Dow components.
Investors anxious about declining oil prices can take solace in knowing that Chevron has a big margin for error in supporting its dividend. Chevron’s capital expenditures and buybacks are near five-year highs. If oil prices tank, Chevron can simply pause buybacks and pull back on capital expenditures. Chevron didn’t cut its dividend when oil prices crashed in 2020, so it stands to reason that it will take a chronic downturn for the corporate even to think about reducing its payout.
Chevron stands out as a balanced buy for investors on the lookout for a safer technique to put money into oil and gas and power their passive income stream.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Idiot’s board of directors. Daniel Foelber has no position in any of the stocks mentioned. The Motley Idiot has positions in and recommends Amazon, Apple, Chevron, Home Depot, Kenvue, Microsoft, and Salesforce. The Motley Idiot recommends Johnson & Johnson and Verizon Communications and recommends the next options: long January 2026 $13 calls on Kenvue, long January 2026 $395 calls on Microsoft, and short January 2026 $405 calls on Microsoft. The Motley Idiot has a disclosure policy.
All It Takes Is $2,500 Invested in Each of These 3 High-Yield Dow Dividend Stocks to Help Generate Over $300 in Passive Income Per Yr was originally published by The Motley Idiot