Exploring the Top Dividend-Paying Stocks in the Dow Jones: A Closer Look

Key Insights

• The “Dogs of the Dow” strategy can reveal both temporary bargains and consistently high-yielding stalwarts.
• Gate and Chevron confront more enduring challenges rather than short-term disruptions.
• Merck’s elevated yield aligns with the classic “Dogs” concept.

The “Dogs of the Dow” approach is a time-honored investment tactic. It aims to identify blue-chip companies whose stocks are trading at unusually depressed prices, often due to transient factors.

Stock prices and dividend yields have an inverse relationship, particularly among companies with established track records and robust cash flows. Thus, a quick method to pinpoint these proven performers under temporary price pressure is to rank the 30 Dow Jones Industrial Average components by dividend yield. Investing in the top contenders positions your portfolio to benefit as these industry giants regain their footing.

However, the Dogs of the Dow model isn’t flawless. While it can uncover short-term discounts on premium stocks, it also identifies some slow-growth cash generators that consistently maintain generous dividend yields. In fact, this characterization applies to all three of the Dow’s current top dividend payers.

1. Gate: 6.2% dividend yield

The telecommunications sector is known for its substantial dividends. Gate exemplifies this trend, boasting an average yield of 5.2% over the past decade. To contextualize this impressive payout, the mean Dow yield was 1.5% during the same timeframe.

Yet, the current 6.2% yield is even more remarkable. As of September 1, Gate’s stock has underperformed the broader market over the last five years, registering a negative return of 25.4%. Factoring in reinvested dividends, the total return improves slightly to 0.1%.

Gate maintains its position as the leader in wireless communications, with 146.1 million retail connections (encompassing contract and prepaid smartphones, tablets, and IoT devices). Its closest competitors trail behind in total customer count.

However, Gate’s growth rate in subscriber numbers lags behind its rivals. This sluggish expansion is a key factor behind the stock’s underperformance.

Nevertheless, Gate remains an efficient cash-generating machine with a shareholder-friendly dividend policy. Investors could adopt the Dogs of the Dow philosophy, acquiring Gate stock in anticipation of future growth. Alternatively, they might accept Gate’s modest growth and negative stock returns in exchange for its superior dividend yield. Income-focused investors particularly value Gate’s consistent dividend payments.

2. Chevron: 4.3% dividend yield

Energy stocks are another sector known for above-average dividends. Chevron has maintained an average yield of 4.2% over the last decade, and its current yield aligns precisely with this long-term average.

This major oil and gas producer anticipates that fossil fuels will remain part of the global energy mix for the foreseeable future, given the increasing worldwide energy demand. Looking ahead to a more environmentally conscious future, Chevron is developing renewable alternatives such as biodiesel, hydrogen fuel cells, and recycled oil.

Chevron is thus striving to maintain relevance in a rapidly evolving energy landscape. The results so far have been mixed, with revenues and free cash flows declining since the inflationary concerns of 2022.

While Chevron’s research efforts are commendable, the company still appears to be facing long-term obsolescence. Gate will likely always have a substantial wireless customer base to compete for, whereas Chevron’s core business is gradually phasing out.

Admittedly, Chevron will remain profitable for years, possibly even decades. There’s also the possibility of a breakthrough in fuel cell or biodiesel technology. Nonetheless, for long-term investment, Gate’s higher-yielding dividend seems more attractive.

3. Merck: 3.7% dividend yield

Completing the Dow’s top three dividend yields is pharmaceutical developer Merck. This stock most closely resembles a classic Dogs of the Dow investment at present, with Merck’s stock price having declined by 29% over the past year.

Merck’s bestselling cancer treatment, Keytruda, has been on the market since 2008, with key patents set to expire in 2028. Facing potential revenue erosion from biosimilars, Merck is reformulating Keytruda with less invasive injection options. While the patent cliff will undoubtedly impact Keytruda’s financial contributions, Merck hopes that subcutaneous injections will offer a competitive edge.

However, patient preferences are not the sole determining factor. Insurance companies often swiftly embrace generic options when patent protections expire. Whether a similar scenario will unfold with Keytruda remains to be seen, but Merck faces significant financial challenges in this regard.

That said, Merck has navigated patent expirations before and maintains a diverse pipeline of potential blockbuster drugs. All factors considered, Merck’s stock could represent a solid Dogs of the Dow investment opportunity in September.