The Dow Jones Industrial Average contains 30 handpicked companies that are, or at least once were, leaders in their respective industries. This makes the index an interesting hunting ground for high-yield stocks. Right now the three highest yielding Dow stocks are Verizon Communications (VZ 0.55%), Chevron (CVX 1.29%), and Amgen (AMGN -0.52%). They are all worth looking at right now, but are any of them worth buying?
1. Verizon has its work cut out for it
Verizon is one of the largest telecom companies in the United States. It holds a material share of the cellphone market, offers high-speed connections to people’s homes, and provides video services. Since it would be very difficult to build a competitor from scratch, Verizon’s industry position is very strong. That’s highlighted by the two decades of annual dividend increases it has laid down. Add in a lofty 6.8% yield and investors should probably find the company attractive.
There’s just one big caveat that you have to consider. In order to protect its industry position, Verizon must constantly invest in its business via large capital projects. As new technology arrives Verizon has to integrate it into its service or it will fall behind, and its competitors, which are also large and well-positioned, will steal customers away.
Alone, this fact isn’t too troubling, but Verizon happens to carry more leverage than either of its two closest peers. In this way, it is at a bit of a competitive disadvantage. That said, the lofty yield, strong dividend history, and industry position suggest that the risk/reward balance here is probably worthwhile for investors willing to take on a little risk.
2. Chevron isn’t at the top of its game
Chevron is one of the largest integrated energy companies in the world. Having exposure across the energy landscape helps to soften the peaks and valleys inherent to the energy sector, given the volatility of oil and natural gas. For most investors, an integrated energy company like Chevron will be the best option for investing in the sector. Chevron backs that up with a 37-year streak of annual dividend increases and a very low debt-to-equity ratio of roughly 0.2. The dividend yield is an attractive 4.5%.
That yield, however, is notably higher than ExxonMobil‘s 3.7%. Exxon is Chevron’s closet peer. So what’s going on? For starters, Chevron’s core business isn’t doing as well as Exxon’s right now. Businesses ebb and flow over time; given Chevron’s long history of success this probably shouldn’t worry long-term investors too much.
Chevron is also in the middle of buying Hess, but the process has been a bit of a struggle. One key reason for this acquisition problem is that Hess has a business relationship with Exxon that has turned into a major roadblock. And yet, even if the Hess deal falls apart, Chevron could easily find another acquisition target if it wanted.
All in, it seems like Chevron is being punished for short-term problems. That is probably opening up a long-term opportunity for dividend investors.
3. Amgen is working on getting its mojo back
Amgen is one of the largest biotech companies you can buy. It has a storied history, including 13 consecutive annual dividend increases. To be sure, this healthcare company is a pretty complex investment. If you don’t want to dig into the finer details of medical trials and research pipelines, you probably shouldn’t buy it. However, it has a long and successful track record of producing valuable, life-saving medications. The yield is around 3.6% today, which happens to be at the high end of the stock’s historical yield range.
Recent history has been a bit tough, as you might expect given the relatively lofty yield. Biosimilar drugs have been gaining traction and eating away at some of Amgen’s biggest successes. The company’s pipeline hasn’t exactly been hitting it out of the park. And some new launches aren’t doing as well as hoped. That’s a trifecta of bad news.
However, no company goes through life without eventually experiencing weak patches. Given Amgen’s long-term success and the fact that it often acts as an industry consolidator, it seems likely that this biotech giant will get back on track at some point. As such, the historically high yield is probably a buying opportunity for those who think in decades and not days.
Mostly good options on the high-yield side of the Dow
There are always caveats when it comes to investing since every company has some warts to consider. But right now, the top high yielders in the Dow seem to offer more positives than negatives. Verizon’s high leverage and heavy spending needs probably make it the riskiest option of the trio, but even there the risk/reward balance seems fairly desirable. If you are looking at Verizon, Chevron, and Amgen, and have a long-term investment horizon, you’ll probably want to pull the trigger on at least one as 2025 gets underway.
Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chevron. The Motley Fool recommends Amgen and Verizon Communications. The Motley Fool has a disclosure policy.
