The Dow Jones Industrial Average(DJINDICES: ^DJI) is one of the most-watched stock indexes on Wall Street. Its list of components is rather small; that small list, however, means these are cherry-picked companies that are both large and highly important businesses.
It makes sense for dividend investors to use the Dow Jones as a shortcut for finding high-yield stocks. But are the highest-yielding stocks in the index today worth buying? Here's a look at the top three.
1. Verizon is a reliable high-yield stock with a lot of debt
The big draw with telecom giant Verizon Communications(NYSE: VZ) is a dividend that yields 6.2% at recent prices. That's way above the 1.2% yield you would collect from the S&P 500 (SNPINDEX: ^GSPC), which is probably the most monitored stock index in the world. Also attractive is the fact that Verizon has increased its dividend annually for more than two decades.
There's just one small problem, and that's its balance sheet.
Verizon's debt-to-equity ratio is 1.45. That's well above the 1.18 for AT&T(NYSE: T), its closest peer, and the 1.28 for T-Mobile US(NASDAQ: TMUS), the next most important competitor in the U.S. cellphone market.
This matters because building a cellular network is a very expensive process and requires constant upgrading to keep pace with the competition. Large capital investments are the norm, and Verizon's more leveraged balance sheet puts it at a disadvantage compared to peers.
This ends up being a risk/reward call. With roughly 57% of Verizon's free cash flow going to dividends in 2024, it's very likely the company can keep supporting that lofty yield and growing its payout, slowly, over time. But if you do buy it, you'll want to keep close tabs on the company's leverage, just in case.
2. Chevron's yield is attractive in a volatile sector
Next up is Chevron(NYSE: CVX) and its 4.5% dividend yield. Being an integrated energy giant means the company's business stretches from upstream operations (drilling for oil and natural gas), to midstream (pipelines), and all the way to downstream (chemicals and refining). This diversification helps to soften the highs and lows within the highly volatile energy sector.
The most notable feat achieved by Chevron, however, is probably its 37-year streak of annual dividend increases. That's the proof that its business model is capable of surviving even the most harrowing swings in oil and natural gas prices while rewarding dividend investors.
Once again, its balance sheet plays an important role, but this time it's because Chevron has very little leverage. That allows management to add debt during the lean times to support its business and dividend.
When the oil market recovers, which it always has historically, management pays down debt to prepare for the next downturn. If you are looking for a dividend-paying energy stock, Chevron is a good all-weather choice with an attractive yield.
3. Merck is a fine business, but it has been cheaper
Merck(NYSE: MRK) is one of the largest drugmakers. It produces some of the world's most important medications, including in the fields of oncology, vaccinations, cardiovascular disease, and animal health.
With $64.2 billion in sales in 2024, Merck is clearly a dominant force in healthcare. And its dividend yield is an attractive 3.4%. It would be hard to suggest that investors would want to avoid this stock.
In fact, looking at traditional valuation metrics, its price-to-sales and price-to-earnings ratios are both below their five-year averages. And while the dividend hasn't been increased every single year, it has trended higher steadily over time. A good company at a good price: What's not to like?
The answer is that the dividend yield is actually only about average compared to the stock's long-term range. It probably wouldn't be a mistake for dividend investors to buy Merck today, but if income is your goal, it has been far more attractive in the past. You might want to watch it and wait for more of a market dislocation, when investors have a tendency to throw the babies out with the bathwater.
Buy all three high-yield Dow stocks?
At the end of the day, there is no company here that investors should be so worried about that they couldn't buy it right now.
Verizon's debt needs to be monitored, but it has deftly managed its balance sheet for years. Chevron operates in a volatile sector, but has proved to be a long-term survivor and reliable dividend payer. And while Merck's yield has been higher in the past -- which may keep some investors on the sidelines today -- it doesn't appear that it would be a mistake to buy the attractively valued stock, either.
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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chevron and Merck. The Motley Fool recommends T-Mobile US and Verizon Communications. The Motley Fool has a disclosure policy.
