Should You Buy the 3 Highest Paying Dividend Stocks in the Dow Jones?

Looking for investment income? Dividend stocks are an obvious place to start your search, but there are so many! For most people, limiting your outlook to the 30 stocks that make up Dow Jones Industrial Average not only will it make the hunt more manageable, but it will also ensure you have high-quality names.

Even so, what Dow stocks? It’s tempting to just throw in the index’s three best-performing names and call it that. But there’s something you might want to know about that strategy before you use it.

The highest-yielding Dow dividend stocks right now

In case you’re wondering, the Dow names with the highest dividend yields right now are the telecom giant Verizon Communications (NYSE: VZ)chemical company Dow Inc. (NYSE: DOW)and the oil giant Chevron (NYSE: CVX)with final yields of 6.5%, 5.3% and 4.5%, respectively. You could certainly do worse.

As veteran investors can attest, however, every investment comes with a trade-off. With above-average dividend yields, you’re likely to see below-average dividend growth and/or below-average capital appreciation. It’s also possible that stocks with strong dividend yields simply present above-average risk to their owners.

In the case of Verizon, Dow and Chevron, it’s mainly the first two trade-offs. I mean, these are all solid companies, but none of them are in growth industries that will support big dividend growth or price gains. Respectable growth? Sure. High growth? Not.

If your only priority is above-average returns and inflation-beating dividend growth, these three tickers will do well. Clearly, the need for wireless telecommunications services never goes away, and neither does the need for industrial chemicals. Even the old-school energy business is pretty well protected for the foreseeable future. Due to population growth and ever-expanding industrialization,

Goldman Sachs believes that global crude oil consumption will continue to rise until 2034 and will continue to be needed for many, many years after that. The energy giant ExxonMobil similarly, it predicts that we will use as much oil in 2050 as we do now.

Given that perspective, Chevron’s dividend will be good for a long, long time. And in at least two out of three cases, future dividend growth will extend impressive dividend growth histories. (Dow split from its parent in 2019 — just before the COVID-19 pandemic — and as such has not yet had a fair chance to increase its dividend payout.)

There’s good reason to expect solid capital appreciation from these three names as well, despite their unusually high dividend yields right now.

The story continues

The Hounds of the Dow

Have you ever heard of the Dogs of the Dow stock picking strategy? If not, it’s not complicated. The strategy simply involves buying the 10 highest-performing Dow stocks at the end of any calendar year and holding them throughout the following year. The theory is that these highest-yielding tokens are unduly undervalued and ripe for a price rebound; the dividends they will distribute in the meantime are just a nice bonus.

The thing is, the strategy works! Although not successful every year, most of the time these high-yielding tickers end up outperforming the Dow itself, as well as S&P 500. The tactic is even more productive with so-called Small Dogs of the Dow (sometimes called Puppies of the Dow), which are just the five lowest-priced Dog of the Dow stocks in a given year. In both cases, investors get mathematically undervalued tokens and then reap the reward for not thinking through their choices (as opposed to walking away from what would have been a smart trade).

Obviously, this rule-based strategy does not apply here and now. It’s not the end of the year, and we’re only interested in three stocks — not 10, or even the five lowest-priced tickers out of the 10. The basic premise still applies, though. That is, you buy proven, dividend-paying stocks at a discount. Timing and quantity are not factors if you are a true long-termer just looking for reliable income stocks to own.

Just do it already

Of course, the idea seems too simple to be effective. The choice of actions is (theoretically) supposed to be complicated, requiring a lot of research that ultimately leads to a court appeal. This approach is anything but a complicated judgment call. And to be fair, there’s certainly no guarantee that this approach will work for you.

At least embrace the basic idea, though. Investors have a knack for making things more difficult than they need to be, often undermining their net returns as a result of not getting into a position they should.

Or, put in simpler terms, don’t overthink things when your universe of possibilities is already limited to the best chips on the market. If you’re looking for above-average dividend income right now — with reasonable hopes for more of the same in the future — the Dow’s three highest-yielding names should do just fine.

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James Brumley has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chevron and Goldman Sachs Group. The Motley Fool recommends Verizon Communications. The Motley Fool has a disclosure policy.

Should You Buy the 3 Highest Paying Dividend Stocks in the Dow Jones? was originally published by The Motley Fool