The 5 highest yields on the Dow

In the tumult of this pullback, investors can find a safe haven in these blue-chip dividend payers.

By StreetAuthority Feb 10, 2014 2:20PM
Customers enter a Verizon Wireless store in New York City on July 23, 2010 (© Jin Lee/Bloomberg via Getty Images)By Tim Begany                                                                               
This year is already a sharp contrast to 2013, when the overall stock market rose an impressive 32 percent.

Following the recent pullbacks, the market only needs to shed about 5 percent more to meet the widely accepted definition of a correction (a decline of at least 10 percent).
 
It has been a while since stock investors have had to endure such pain, so further sell-offs may prompt many to seek safer havens -- especially if a full-on correction materializes soon. Since bonds don't generally offer much in the way of returns right now, investors who want to dial back risk but still make money should consider top-flight large-cap stocks with attractive yields.

You might think they'd be hard to find after the market's long run-up, but they're available -- right under our noses, really. To spot them, just scan the list of stocks in the Dow Jones Industrial Average. You'll quickly see the index's top five dividend payers all have generous yields in the 4 percent to 6 percent range. And you should be able to count on them for attractive payouts for years to come.

1. AT&T (T)
The ongoing price war between AT&T (which my colleague Marshall Hargrave profiled recently) and its main rivals Verizon (VZ), T-Mobile (TMUS) and Sprint (S) is heating up.

The latest escalation: deep discounts by T-Mobile to try to elevate itself from the No. 4 spot in the cellular services industry. T-Mobile may end up shooting itself in the foot, though. AT&T and Verizon are far larger and better able to withstand price wars while staying profitable and paying dividends.

In AT&T's case, the company has hiked its dividend by 4 percent or 5 percent a year for more than a decade, and even the recent recession didn't hinder this. As an industry leader with cash and equivalents of $22.7 billion and annual free cash flow of nearly $16 billion, AT&T should easily be able to maintain its pace of dividend increases.

Recent price: $32.50
52-week range: $31.90-$39
P/E ratio: 9.5
Dividend per share: $1.84
Yield: 5.7 percent

2. Verizon (VZ)
Verizon is swimming in cash, too, with $21.2 billion of cash and equivalents and annual free cash flow of $17.9 billion. And it's the premier wireless carrier in the U.S., serving about 103 million retail customers nationwide through its 55 percent stake in Verizon Wireless.

Last September, the firm said it would buy the remaining 45 percent from Vodafone (VOD) for $130 billion in cash and stock, and the deal is expected to close sometime this quarter. Management estimates the acquisition will immediately boost earnings per share (EPS) by about 10 percent, excluding any one-time adjustments.

Like AT&T, Verizon has long offered reliable dividends, which have ranged from $1.54 to the current $2.06 per share during the past decade or so. The company should be able to raise its dividend at least as quickly as AT&T, especially once it owns Verizon Wireless outright.

Recent price: $47
52-week range: $44.11-$54.31
P/E ratio: 11.7
Dividend per share: $2.06
Yield: 4.4 percent

3. Intel (INTC)
Intel is the world's largest semiconductor company, holding 80 percent of the $30 billion microprocessor market. Its success has enabled it to raise its dividend more than 11-fold during the past decade, from 8 cents a share in 2003 to 90 cents today.

I doubt the company can increase its dividend that fast in coming years because it depends so heavily on the PC market for revenue, and that market is mature. However, there ought to be many growth opportunities for Intel's server processor business. That segment should greatly benefit from the rise of cloud computing since servers are crucial for that fast-growing industry's infrastructure. Thus, I'd look for Intel to deliver more modest but still attractive dividend growth of, say, 12 percent a year, which would bring the firm's payout to $1.59 a share in 2019.

Recent price: $23.50
52-week range: $20.10-$27.12
P/E ratio: 12.5
Dividend per share: $0.90
Yield: 3.8 percent?

4. Chevron (CVX)
As you might have guessed from a stock price at the bottom of the 52-week range, the market has been disappointed with Chevron lately. In fact, shares have fallen more than 10 percent during the past month on a recent earnings miss, higher operating costs, and lower production. What's more, management expects production to remain flat in 2014, coming in at the 2012 and 2013 levels of around 2.6 million barrels of oil per day equivalent. However, I see this as a chance to buy a great dividend payer cheap. Solid growth should resume in 2015 as several major projects focusing on liquid natural gas production begin to bear fruit. So I'm confident Chevron can maintain dividend growth of about 10 percent per year like it achieved during the past decade.

Recent price: $110
52-week range: $109.46-$127.83
P/E ratio: 9.9
Dividend per share: $4
Yield: 3.6 percent

5. General Electric (GE)
Thanks to the financial crisis, GE had to slash its dividend by more than 50 percent in 2009 to $0.61 a share. The company is back on track, though, posting dividend growth of nearly 10 percent a year since the crisis.

A variety of compelling factors suggest GE can maintain this growth rate, such as its huge $125.9 billion cash position, increasing dominance of the burgeoning clean energy industry, and improved profitability and capitalization of the retail finance portion (loans and credit cards) of its GE Capital segment. It's common knowledge that GE has been shoring up the retail finance business in preparation for a spin-off sometime in the next couple years. So in addition to enjoying reliable dividends, shareholders might also profit from GE by getting shares of the new company when it has its IPO.

Recent price: $24.40
52-week range: $21.11-$28.09
P/E ratio: 17.9
Dividend per share: $0.88
Yield: 3.6 percent

Risks to consider: Although T, VZ, INTC, CVX and GE pay nice dividends and are among the safest types of stocks investors can own, they're still stocks. Price variations can often be much greater than those of bonds and other more conservative investments.

Action to take: As stock market volatility picks up and the likelihood of a correction rises, consider increasing your allocation to safer dividend-paying stocks like the ones I've described here. Such stocks typically weather corrections better than smaller, riskier ones -- with the added advantage of providing greater income during downturns.

More from StreetAuthority

2Comments
Feb 11, 2014 8:54AM
avatar
My eye is on GE, but not till it comes down more or the fed stops feeding false valuations.
Feb 11, 2014 8:59AM
avatar
Load up now, the 10Yr T is falling and stocks this yr will have trouble climbs...so go div's !!!!
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