Blue chip companies in the DJIA, with proven earnings power and consistent dividend growth, are some of the best dividend plays out there. They are usually leaders in their industries—the companies that boast strong balance sheets and lower operating risk than other stocks and the market as a whole. The index consists of 30 large-cap stocks that pay dividends. The index as a whole has the average dividend yield of 2.7% as of November 29, 2012. The telecommunications giant AT&T Inc. (NYSE:T) pays the highest dividend yield of the DJIA constituents, with its yield double that of the average for the index as a whole. Among the DJIA members, The Procter & Gamble Company (NYSE:PG), 3M Co (NYSE:MMM), The Coca-Cola Company (NYSE:KO), and Johnson & Johnson (NYSE:JNJ) have raised dividends for at least 50 consecutive years.
We have evaluated five DJIA constituents with dividend yields at or above the index average, track record of strong earnings power and dividend growth, the outperformance relative to peers in terms of total returns, and a better position than peers’ to boost dividends in the future. Here is a closer look at “the best” five dividend stocks of the Dow 30 based on the aforementioned criteria.
McDonald's Corporation (NYSE:MCD), the world’s largest chain of fast food restaurants, has raised dividends for 36 consecutive years, through recessions, wars, currency and financial crises, an oil shock, and a near depression. It currently pays a dividend yield of 3.6%, well above the dividend yields of 1.0% for Burger King Worldwide Inc (NYSE:BKW) and 1.8% for rival Yum! Brands, Inc. (NYSE:YUM). McDonald’s stock has raised dividends at a rate of almost 14% per year over the past five years, generating total returns of 11.6% per year over the same period. Over the past half decade, its EPS grew at 18.1% per year. Analysts expect the company to realize a lower EPS growth of about 9.0% per year for the next five years. With a payout ratio of 58% and continued growth in EPS, additional dividend increases, possibly somewhat more moderate than in the past, are expected in the future. The stock has a high ROE of 40%. In October, McDonalds reported weak same-store sales in all geographical regions, reflecting an extended weakness in the labor markets that is weighing on discretionary spending. Still, over the long run, the restaurant chain will benefit from emerging market growth and the expansion of product and service offerings. In terms of valuation, on a forward P/E of 15.3, the stock is trading at a discount to its respective industry. In the third quarter, Bill & Melinda Gates Foundation Trust (check out its top positions) initiated a new position in the stock worth more than $905 million.
Chevron Corporation (NYSE:CVX), a $206-billion integrated oil and natural gas giant, has raised dividends for 24 years in a row, a year away from becoming a dividend aristocrat. Chevron currently pays a dividend yield of 3.4% on a low payout ratio of 30%. Its peers Exxon Mobil Corporation (NYSE:XOM), another DJIA constituent, and ConocoPhillips (NYSE:COP) yield 2.6% and 4.6%, respectively. Chevron has raised dividends, on average, by 9.2% per year over the past five years. In terms of total returns, the stock has returned 7.4% annually over the same period. Its EPS expanded at 11.5% annually over the past half decade. Analysts forecast that the energy giant’s EPS will be flat for the next five years, due to anticipated lower output and oil prices. Still, the company has little long-term debt, some 9% of its equity, and plenty of cash at hand. With nearly $11 per share in cash and equivalents, this company is committed to maintaining high liquidity in order to mitigate possible oil price volatility and cost overruns at capacity expansion projects. Future dividend boosts are almost certain. The stock has a ROE of 19%. As regards its valuation, the stock is trading on a forward P/E of 8.7, a discount to its respective industry and its larger competitor Exxon Mobil. The stock is popular with value investors Ken Fisher and Stanley Druckenmiller (check out his largest holdings).