Table of Contents
The Dow Jones Industrial Average (DJINDICES: ^DJI) has 30 leading components that act as representatives of the U.S. economy. The index’s rich history has made it a popular destination for investors looking for quality names that can help them generate dividend income.
Over time, the composition of the Dow Jones has changed to reflect the growing influence of technology on the economy, helping the Dow Jones to post impressive gains in recent years. But even tough Dow names love Coca-cola, Home DepotAnd McDonald’s have been has risen higher and higher in recent months and helped the index reach a new all-time high on October 11.
Despite the Dow Jones’ track record, not every component has a high yield or has been a reliable dividend stock. BoeingThe slew of challenges is putting pressure on the company to suspend its dividend. Technology stocks like Microsoft, AppleAnd Salesforce have returns of less than 1%, and Amazon does not pay dividends.
Johnson & Johnson (NYSE: JNJ), Dow (NYSE: DOW)And Chevron (NYSE:CVX) are three of the highest-yielding stocks in the index. Investing $2,500 in each stock yields an average return 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.
J&J has faced significant challenges in recent years
Johnson & Johnson (J&J) is a Dividend King with 62 consecutive years of dividend increases. The company has long been known as a powerhouse in the passive income space. But the past few years have been challenging, as evidenced by the languishing share price.
J&J has been a leader in COVID-19 vaccine development, which was initially a boon for the company. But rapidly declining demand for the vaccine has put such a strain on the company that J&J is now reporting many of its results as “excluding the impact of the COVID-19 vaccine.”
Another challenge was adjusting to the spin-off of J&J’s consumer health business, which took place in August 2023. Former J&J brands, such as Band-Aid and Tylenol, now fall under the new entity. Kenvue. The spin-off should help J&J become a faster-growing company by focusing on just two segments: Innovative Medicine and MedTech. However, it does remove some of the safe and rigid parts of the company that made J&J a rock-solid dividend stock regardless of the economic cycle.
Finally, J&J has faced lawsuits alleging that its talc-based products have led to the development of cancer. J&J restructured and created a subsidiary called Red River Talc LLC, which filed for Chapter 11 bankruptcy on September 20 to handle current and future claims.
After a messy few years, J&J is finally ready to turn the corner. The company has delivered solid results and has grown at a pace that should support good, if not excellent, dividend increases going forward. J&J generates a lot of free cash flow that easily covers its dividend costs. And with a yield of 3.1%, J&J stands out compared to the S&P500 dividend yield of only 1.2%.
Dow is a coil spring for economic growth
Not to be confused with the “Dow” in the Dow Jones Industrial Average, Dow makes chemicals used in plastics, sealants, foams, gels, adhesives, resins, coatings and more. The commodity chemicals company has three major 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 supply and demand. Dow has been hit hard by volume declines and lower margins. In the following chart, you can see that revenue and margins rose sharply in 2021 and early 2022, but have fallen significantly since then. Likewise, the stock price has gone virtually nowhere since the spin-off.
Dow blames macroeconomic factors as a major reason for the weak results. However, low interest rates could benefit many of the company’s end markets. For example, lower mortgage rates could boost housing demand, which would benefit Dow’s polyurethanes and construction chemicals businesses. Lower interest rates could also stimulate demand for durable goods.
Overall, Dow is well positioned to see significant earnings growth next year. Analyst consensus estimates are for earnings per share of just $2.26 in 2024, but $3.55 in 2025. While the Dow Jones looks expensive based on its lagging earnings, it would have a much more reasonable valuation if it were to meets expectations.
Despite the volatility of Dow’s performance, it has proven to be a reliable income stock in 2019, breaking away from DowDuPont in 2019. Dow yields 5.2%, making it the second highest yielding stock in the Dow Jones, behind only Verizon Communications. Dow has not increased its payout since the spinoff, but has included share buybacks as part of its capital return program. The company’s goal is to return 65% of profits to shareholders through buybacks and dividends, so it has enough dry powder to finance long-term investments in new production plans, decarbonization efforts and more.
Overall, Dow is a good value stock for income investors to consider now.
A quality energy stock with a high return
Like Dow, Chevron can be a highly cyclical company whose results are heavily influenced by commodity prices. But Chevron has a strong balance sheet, a diversified upstream business that isn’t dependent on one production region, a huge refinery, and a track record of increasing its dividend no matter what oil prices do.
Chevron has paid and increased its dividend for 37 years in a row. Chevron yields 4.3%, the third highest yield in the Dow Jones. The company’s track record of dividend increases, combined with its high yield, makes it perhaps the best passive income scenario among the 30 Dow components.
Investors worried about falling oil prices can take comfort in knowing that Chevron has a wide margin for error in supporting its dividend. Chevron’s capital expenditures and buybacks are near five-year highs. If oil prices fall, Chevron can simply pause buybacks and scale back capital expenditures. Chevron didn’t cut its dividend when oil prices collapsed in 2020, so it stands to reason that it would take a prolonged recession for the company to even consider cutting its payout.
Chevron stands out as a well-balanced buy for investors looking for a safer way to invest in oil and gas and fuel their passive income stream.
Should You Invest $1,000 in Johnson & Johnson Now?
Before you buy shares in Johnson & Johnson, consider the following:
The Motley Fool stock advisor The analyst team has just identified what they think is the 10 best stocks for investors to buy now… and Johnson & Johnson wasn’t one of them. The ten stocks that survived the cut could deliver monster returns in the coming years.
Think about when Nvidia created this list on April 15, 2005… if you had $1,000 invested at the time of our recommendation, you would have $845,679!*
Stock Advisor provides investors with an easy-to-follow blueprint for success, including portfolio building guidance, regular analyst updates, and two new stock picks per month. The Stock Advisor is on duty more than quadrupled the return of the S&P 500 since 2002*.
*Stock Advisor returns October 14, 2024
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Daniel Foelber has no position in any of the stocks mentioned. The Motley Fool holds positions in and recommends Amazon, Apple, Chevron, Home Depot, Kenvue, Microsoft and Salesforce. The Motley Fool recommends Johnson & Johnson and Verizon Communications and recommends the following options: long January 2026 $13 calls on Kenvue, long January 2026 $395 calls on Microsoft, and short January 2026 $405 calls on Microsoft. The Motley Fool has one disclosure policy.
All it takes is $2,500 invested in each of these three high-yield Dow Dividend stocks to generate more than $300 in passive income per year was originally published by The Motley Fool