How can you find the best dividend stocks on the Dow Jones Industrial Average (INDEXDJX:.DJI)? There are so many ways to approach the search. Some dividend stocks have large current yields. Others rise to the top with relentless payout boosts over decades. Still other dividend stocks look good because of ample headroom to raise yields in the future.
But sometimes you just hit the jackpot. A handful of Dow Jones Industrial Average (INDEXDJX:.DJI) components combine several of these criteria to become the best dividend stocks overall. Here’s my short list.
Health insurance giant UnitedHealth Group Inc. (NYSE:UNH) may not have the juiciest payout today, topping out at a modest 1.4%. But the payout has been increased by a compound annual growth rate of 60% over the last decade. Moreover, the company pumps just 10% of its prodigious free cash flow into dividend payments right now. That’s one of the lowest cash-payout ratios on the Dow Jones Industrial Average (INDEXDJX:.DJI)– and one big reason why I think it’s one of the blue-chip index’s top dividend stocks. The room to grow payouts here is almost unlimited.
Microchip veteran Intel Corporation (NASDAQ:INTC) comes close to UnitedHealth’s skimpy payout ratio and lofty headroom for growth, using 14.5% of its free cash to fund dividend checks. The rock-steady 17% annual dividend growth isn’t far behind the insurer’s.
Here’s the cherry on top: Rapid changes in Intel’s core markets have led to a massive sell-off of Intel shares over the last year, which in turn pushes up dividend yields. Today, Intel Corporation (NASDAQ:INTC) shares provide an astounding 4.2% yield. This top dividend stock is so strong that I bought some of it myself.
If all you really want is a massive yield right now and you’re not sure that Intel Corporation (NASDAQ:INTC) will navigate the uncharted waters ahead, you can’t beat the big telecoms.
That being said, I would still rather buy Intel or UnitedHealth for a long-term income portfolio. Why don’t the telecoms make the cut? Because they don’t have much of a history of dividend increases. Compare and contrast them with Intel Corporation (NASDAQ:INTC), for example:
The article The Best Dividend Stocks on the Dow originally appeared on Fool.com is written by Anders Bylund.
Fool contributor Anders Bylund owns shares of Intel, but he holds no other position in any company mentioned. Check out Anders’ bio and holdings or follow him on Twitter and Google+. The Motley Fool owns shares of Intel. Motley Fool newsletter services have recommended buying shares of UnitedHealth Group (NYSE:UNH) and Intel.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.