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

The Dow Jones Industrial Average (^DJI 1.56%) fell sharply after the U.S. released a new tariff program. Does that open up some opportunities for investors who like high-yield stocks? A quick look at the three highest-paying dividend stocks on the index -- Merck (MRK 2.05%), Chevron (CVX 0.38%), and Verizon (VZ 1.77%) -- is a good place to start if you want to find out.

3. Merck is a pharmaceutical giant

Merck's 4% dividend yield is near the highest levels of the past decade, though it's been much higher in the past. That said, the company's 15-year dividend growth streak isn't the whole story on the dividend. It has trended generally higher for far longer than that, with some periods in which it remained the same and didn't grow. All in, it has proven to be a pretty reliable dividend stock.

Merck has a broad pharmaceutical portfolio, with drugs in cardiometabolic health, oncology, vaccines, infectious diseases, and even animal health. Although the company is leaning on its oncology business today for growth, it has a deep pipeline of drugs in the works.

Drug development, however, can be a bit lumpy and competition is fierce. This helps explain why Merck's stock is a bit weak and the yield a bit high. It has a long history of success, but it is hard to predict what drugs will turn out to be winners and losers. In the meantime, Wall Street is very aware that the company's most important oncology drug is facing a patent cliff in a few years.

If your investment horizon is measured in decades, however, Merck is probably a worthwhile high-yield Dow stock to consider for your portfolio. It has found ways to keep supporting dividend growth before, and will likely do so again this time around as well.

2. Chevron is usually a good oil option

Chevron is a globally diversified integrated energy giant. That means it has operations in the upstream (energy production), midstream (pipelines), and downstream (refining and chemicals) segments of the broader energy industry. Each segment operates and performs a little differently through the energy cycle, so having all three under one roof helps to soften the inherent swings of the industry. The proof of that is Chevron's impressive 38-year streak of annual dividend increases.

One of the keys to Chevron's success is its rock-solid balance sheet, with a debt-to-equity ratio of just 0.15x or so. Low leverage allows management to add debt during oil downturns so it can continue to support the business and the dividend. When oil prices recover, as they always have in the past, debt levels are reduced. Although Chevron's 4.7% yield isn't the highest it has ever been, it is still pretty attractive relative to other income options, as well as the energy industry average of 3.1% or so.

This is an all-weather energy stock built to survive hard times. It is a pretty good choice in the energy sector today. Actually, it is usually a pretty good choice most of the time. The only time you might find it less than attractive is when oil prices are in a huge rally, which is not the current state of the market.

1. Verizon is the highest yielding stock in the Dow

Of the top-yielding stocks, Verizon is the most difficult to justify buying. Yes, the dividend yield is a lofty 6.3%, and the dividend has been increased annually for two decades. But the average annualized increase over the past decade was just 2% a year. By comparison, Merck's dividend grew at around 5% a year, and Chevron's expanded at 4.5% or so.

That big yield is likely to make up most of your return over time. And the buying power of the dividend may not keep pace with inflation if you spend the dividends you collect instead of reinvesting them.

That doesn't mean you should avoid Verizon; just go in with the right expectations. There are two more issues you have to wrap your head around, however.

First, Verizon's telecommunications customer base creates an annuity-like income stream. That's good. But to maintain that income stream, it needs to spend heavily on its infrastructure, which is not so good.

And that brings up the second point: Verizon is more heavily leveraged than its closest peers. It should have no problem competing, but there probably won't be much cash left behind for growing the dividend. This brings the story all the way back to the miserly dividend growth rate.

Verizon isn't a bad dividend investment, but it is probably most appropriate for someone that's in the distribution phase of their financial life cycle, not the accumulation phase.

The top three could all be worth buying

It wasn't too long ago that the top-yielding Dow stocks included deeply troubled retailer Walgreens (WBA 0.75%) and highly cyclical chemical maker Dow (DOW 4.09%). Those were hard high-yield stocks to love.

But today's crew of top yielders is more attractive. Slow dividend grower Verizon is a bit of an acquired taste, but Chevron and Merck will be more broadly appealing.