This 7.7%-Yielding Dividend Stock Has Maintained Its Payment for 24 Quarters in a Row. Can That Streak Continue in 2025?

It's been a rough period for investors in commodity chemical companies. Dow Inc. (DOW -0.65%) and its peer LyondellBasell have seen their stock prices collapse to four-year lows -- with both stocks down over 29% in the last year. The sell-off has pushed Dow's dividend yield up to a whopping 7.7% -- making it an enticing passive income play. But investors should first make sure Dow can afford its expensive payout before buying the stock.

Here's a look at why Dow is struggling and if the dividend stock is a buy now.

Image source: Getty Images.

A severe cyclical slowdown

Higher interest rates tend to increase borrowing costs, which can slow economic growth. Dow's products are used in a variety of end markets, from agriculture to construction, chemical manufacturing, electronics, oil and gas, mining, pulp and paper, paints and coatings, packing, films, tapes, liners, textile goods, consumer goods, personal care products, and more. The global economy runs on plastics and other manufacturing materials, which gives Dow a large pool of buyers, but also leaves it vulnerable to competition.

Since Dow makes commodity products, it lacks pricing power because there is little product differentiation. Think about how price dictates the bulk of decision-making when buying gasoline. Specialty chemical companies can vary more in performance. Therefore, Dow works to boost margins through efficiency improvements, lower costs, a better supply chain, and other efforts.

Unfortunately, Dow can't control global demand or changes in economic policy, like tariffs. Tariffs are a risk to Dow because they could lead to higher manufacturing costs. Dow may struggle to pass along those increased costs to customers because the products it makes are susceptible to fluctuations in demand. if a company like Coca-Cola faces higher input costs, it has better potential to pass those costs along to consumers because it has relatively steady demand regardless of the economy which boosts Coca-Cola's pricing power.

Dow is facing the one-two punch of weak global demand and intense competition, which is why margins have fallen off a cliff in recent years.

Here's a look at Dow's sales and operating margin since it became an independent company in 2018.

Data by YCharts.

As you can see in the chart, Dow can generate solid margins off high revenue, making it a cash cow during periods of expansion. But it is also prone to cyclical downturns, with the current downturn being the worst in seven years.

Investors looking at Dow's 7.7% yield will want to know if can afford its payout if this downturn persists.

The state of the dividend

Dow's goal is to have its dividend payment comprise 45% of operating income and its dividend plus share repurchases to be 65% of operating income. It hasn't been in that range since 2021. And even after pulling back on stock repurchases, its capital return program exceeded its operating income in the last two years.

Data source: Dow, YCharts.

On Dow's fourth-quarter 2024 earnings call on Jan. 30, management discussed ways it was tightening capital expenditures (capex) to try to bolster its cash position and protect its dividend. But it also didn't shy away from discussing the extent of the downturn -- especially in Europe and China. Dow CEO James Fitterling said the following on the earnings call:

I don't want to be doom and gloom about Europe, but I think we have to be realistic that downstream demand is not coming back. And so, we're going to have to take actions there to tighten things up. And then, of course, cash, we're going to manage very carefully, which is why you saw the capex reductions that we announced to try to stay in a better cash-flow position and keeping our dividend strong is one of the No. 1 priorities.

Dow management forecasts 2025 capex of $3 billion to $3.2 billion and dividend payments of around $2 billion -- implying no change from last year. So for 2025, Dow's cost-saving efforts should allow it to support its current dividend payment, building upon its streak of 24 consecutive quarters of paying $0.70 per share in dividends.

On the earnings call, an analyst asked why maintaining the dividend was a better use of cash than improving the balance sheet or reinvesting in the business. Management responded that 65% of owners count on the dividend, so delivering on the dividend has become a top priority.

Dow only has $500 million in debt maturing in 2025 and no substantial debt maturities until 2027. So, at least in the near term, there isn't too much strain to support the dividend.

Dow's dividend is safe for now

Dow should be able to extend its dividend streak this year. If the cycle begins shifting next year, Dow could move closer to its goal of having the dividend make up 45% of operating income.

Management has been candid about the severity of the downturn and challenges across end markets, so investors should watch for indications that the cycle could be shifting. If a global recession or a prolonged downturn carries forward for the next few years, Dow has already set the stage for weakness in 2027. It could simply blame a dividend cut or temporary dividend suspension on the need to pay off maturing debt. Still, even if Dow cut its dividend in half, it would be a solid source of passive income.

Add it all up, and investors with at least a three- to five-year time horizon may want to consider scooping up shares of Dow as a coiled spring for an economic recovery and an excellent source of passive income.