At Dow Jones Industrial Average (DJINDICES: ^DJI) has 30 industry-leading components that act as representatives of the US economy. The index’s rich history has made it a destination for investors looking for quality names that can help generate dividend income.
Over time, the composition of the Dow has changed to reflect the growing influence of technology on the economy, which has helped the Dow generate impressive gains in recent years. But even stodgy name Dow like Coca-Cola, Home Depotand McDonald’s has roared further in the new month and helped the index achieve a fresh all-time high on October 11.
Despite the Dow’s track record, not every component has high yields or has been a reliable dividend stock. BoeingThe deadly challenge forced the company to suspend dividends. Tech stocks are like that Microsoft, Appleand Salesforce have a yield of 1%, and Amazon does not pay dividends.
Johnson & Johnson (NYSE: JNJ), Dow (NYSE: DOW)and Chevron (NYSE: CVX) are three of the highest-yielding stocks in the index. Investing $2,500 in each stock yields an average of 4.2% and should generate at least $300 in passive income per year. Here’s why all three dividend stocks should be bought now.
J&J has overcome significant challenges over the past few years
Johnson & Johnson (J&J) pays dividends 4 times a year, the last payment of dividends on J&J shares is 12/31/2019. The company has long been known as a passive income powerhouse. But the past few years have been challenging, as reflected in the dismal share price.
J&J is a leader in the development of a COVID-19 vaccine, which was initially a boon for the company. But rapidly declining vaccine demand has been a drag on the company so far that J&J reports most of its results as “excluding the impact of the COVID-19 vaccine.”
Another challenge is adjusting to the spin-off of J&J’s consumer health business, which is set to take place in August 2023. Former J&J brands, such as Band-Aid and Tylenol, are now under the new entity. Kenvue. The spinoff should help J&J become a faster company by focusing on two segments – Innovative Medicine and MedTech. It does, however, remove some of the safe, stodgy parts of the business that make J&J a solid dividend stock, no matter the economic cycle.
Finally, J&J has dealt with a lawsuit that says its talc-based products cause cancer development. J & J restructured and created a subsidiary called Red River Talc LLC, which filed for Chapter 11 bankruptcy on September 20 to handle current and future claims.
After years, J&J is finally ready. The business has produced solid results and is growing at a rate that should support a decent, if not spectacular, dividend increase. J&J generates a ton of free cash flow that easily covers the cost of the dividend. And with a yield of 3.1%, J&J stands out in comparison S&P 500 dividend yield is only 1.2%.
The Dow is a coiled spring for economic growth
Not to be confused with the “Dow” in the Dow Jones Industrial Average, Dow makes chemicals used in plastics, seals, foams, gels, adhesives, resins, coatings, and more. The commodity chemical company has three main segments – Packaging & Specialty Plastics, Industrial Intermediates & Infrastructure, and Performance Materials & Coatings.
Dow’s business model is capital intensive and vulnerable to fluctuations in global demand and supply. The Dow has been hit hard by declining volumes and lower margins. In the chart below, you can see that revenues and profits increased in 2021 and early 2022, but have declined significantly since then. Also, the stock price has been nowhere since the spinoff.
Dow blamed macroeconomic factors as the main reason for the weak results. However, low interest rates can benefit many companies in the end market. For example, lower mortgage interest rates could boost housing demand, which would help Dow’s polyurethane and construction chemicals businesses. Lower interest rates can also boost demand for durable goods.
Overall, the Dow is well positioned to see sizable earnings next year. The analyst consensus forecast is only $2.26 in earnings per share (EPS) in 2024 but $3.55 in 2025 EPS. Although the Dow looks expensive based on its trailing earnings, it will have far more reasonable value if it delivers on expectations.
Despite the volatility of the Dow’s performance, it has proven to be a reliable income stock from DowDuPont in 2019. The Dow returned 5.2%, making it the second highest yielding stock in the Dow Jones, just behind it. Verizon Communications. Dow has not raised its payout since the spinoff, but has incorporated stock repurchases as part of its capital return program. The company’s goal is to return 65% of its earnings to shareholders through buybacks and dividends in order to have enough dry powder to finance long-term investments in new production plans, low-carbon efforts, etc.
Overall, the Dow is a good value stock for income investors today.
High quality energy storage with high yield
Like the Dow, Chevron can be a highly cyclical business whose results are heavily influenced by commodity prices. But Chevron has a strong balance sheet, a diverse upstream business that doesn’t rely on a single production area, a large refining business, and a track record of raising its dividend no matter what oil prices do.
In fact, Chevron has paid and raised its dividend for 37 consecutive years. Chevron returned 4.3%, which was the third highest yield in the Dow Jones. The company’s track record for dividend increases, paired with high yields, makes it arguably one of the best passive income players out of the 30 Dow components.
Investors worried about the drop in oil prices can be comforted by the knowledge that Chevron has a large profit margin for the mistake of supporting the dividend. Chevron’s capital spending and buybacks are near five-year highs. If oil prices tank, Chevron can simply pause buybacks and pull back on capital expenditures. Chevron did not cut its dividend when oil prices collapsed in 2020, so it stands to reason that the company will see a prolonged decline, even if it considers reducing payouts.
Chevron stands out as a balanced buy for investors looking for a safer way to invest in 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 Fool’s board of directors. Daniel Foelber has no position in any of the stocks mentioned. The Motley Fool has positions and recommendations for Amazon, Apple, Chevron, Home Depot, Kenvue, Microsoft, and Salesforce. The Motley Fool recommends Johnson & Johnson and Verizon Communications and recommends the following 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 Fool has a disclosure policy.
All You Need Is $2,500 Invested in Each of These 3 High Dividend Dow Stocks to Help Make Over $300 in Passive Income Every Year was originally published by The Motley Fool
