The Dow Jones Industrial Average (^DJI -0.93%) has 30 industry-leading components that act as representatives of the U.S. economy. The index's rich history has made it a go-to destination for investors looking for quality names that can help them 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 produce impressive gains in recent years. 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 company to suspend its dividend. Tech stocks like Microsoft, Apple, and Salesforce have yields under 1%, and Amazon doesn't pay dividends.
Johnson & Johnson (JNJ -0.34%), Dow (DOW -0.34%), and Chevron (CVX -0.13%) are three of the highest-yielding stocks in the index. Investing $2,500 into each stock produces an average yield of 4.2% and should generate at least $300 in passive income per year. Here's why all three dividend stocks are worth buying now.
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J&J has dealt with significant challenges over the last few years
Johnson & Johnson (J&J) is a Dividend King with 62 consecutive years of dividend increases. The company has long been known as a stodgy passive-income powerhouse. But the last few years have been challenging, as reflected in its languishing stock price.
J&J was a leader in COVID-19 vaccine developments, which was initially a boon for the company. But rapidly declining demand for the vaccine has been a drag on the company to the point where J&J now reports many of its results as "excluding the impact of the COVID-19 vaccine."
Another challenge has been adjusting to the spinoff of J&J's consumer health business, which occurred 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 be a faster-growing company by focusing on just two segments -- Innovative Medicine and MedTech. However, it does remove some of the safe and stodgy parts of the business that made J&J a rock-solid dividend stock, no matter the economic cycle.
Finally, J&J has been dealing 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 ready to turn the corner. The business has been putting up solid results and growing at a rate that should support good, if not excellent, dividend raises going forward. J&J generates a ton of free cash flow that easily covers its dividend expense. And with a yield of 3.1%, J&J stands out compared to the S&P 500 dividend yield of just 1.2%.
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 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 supply. Dow has been hit hard by volume declines and lower margins. In the following chart, you can 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 since the spinoff.
Dow has blamed macroeconomic factors as a key reason for its weak results. However, low interest rates could greatly benefit many of the company's end markets. For example, lower mortgage interest rates could boost housing demand, which would help Dow's polyurethanes and construction chemicals business. Lower interest rates could also boost demand for durable goods.
Overall, Dow is well positioned to see a sizable uptick in earnings next year. 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 would have a far 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 in the Dow Jones, behind only Verizon Communications. Dow hasn't raised its payout since the spinoff, but it has incorporated stock repurchases as part of its capital return program. The company'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 new production plans, low-carbon efforts, and more.
Overall, Dow is a good value stock for income investors to consider now.
A quality energy stock with a high yield
Like Dow, Chevron can be a highly cyclical business whose results are heavily impacted by commodity prices. But Chevron has a strong balance sheet, a diversified upstream business that doesn't depend on one production region, a massive refining business, and a track record for raising its dividend no matter what oil prices are doing.
In fact, Chevron has paid and raised its dividend for 37 consecutive years. Chevron yields 4.3%, which is the third-highest yield in the Dow Jones. The company's track record for dividend raises, paired with its high yield, makes it arguably the single best passive income play out of the 30 Dow components.
Investors worried about declining oil prices can take solace in knowing that Chevron has a large 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 would take a prolonged downturn for the company even to consider reducing its payout.
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.
