The Highest-Yielding Dow Stocks

Dividend stocks have realized a resurgence of investor interest the past few years, and with good reason. With the markets continuing their unpredictable and volatile swings, who wouldn't want a little extra guaranteed return?

Evidence continues to show that dividend-paying equities are among the best wealth-building vehicles out there. The chart below illustrates why.

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With that in mind, I tried to seek out some of the most stable, highest-yielding dividend stocks I could.

My obvious first stop was the Dow Jones Industrial Average (INDEX: ^DJI) . The index is comprised of 30 blue chip stocks, a category defined by their financial soundness. And considering more than half of the companies have been registered on the Dow for two decades or more, you can sleep soundly knowing they're here to stay.

After sorting all 30 components by yield, I also took a look at the interest coverage and payout ratios, because the dividend is only as good as the company that backs it.

Company

Dividend Yield

Payout Ratio

Interest Coverage Ratio

AT&T (NYS: T) 5.91 257.9 3.43
Verizon 5.32 231.1 4.56
Merck (NYS: MRK) 4.37 -- --
Pfizer (NYS: PFE) 4.17 -- --
General Electric (NYS: GE) 3.63 -- 16.0

Source: S&P Capital IQ.

A quick glance at this chart and we can see that telecom stocks reign supreme on the Dow. It's no surprise, really, and actually quite common in this space. In fact, some of the highest-yielding stocks out there are communications companies like Frontier Communications and Otelco, which yield 16.6% and 13.3%, respectively. Despite the greater than 200% payout ratios for both of these companies, I'm not worried. The telecom space will continue to provide consistent dividends to shareholders as either wireless or wire-line service remains an essential part of daily life.

Right behind the big telecom heavies are the big pharma companies Merck and Pfizer. Looking at historic payout ratios for these companies doesn't give me much reason to worry that their dividends will be unsustainable. Over the past few years, Pfizer has averaged a little higher than a 60% payout ratio, while Merck, with the exception of a supernaturally high 2010, is about the same. While I like these companies for their buy-and-hold potential, the recent patent cliffs that Pfizer fell off do have me just a touch more worried than usual. Their effort to squeeze life out of an expired patent through wholesale sales seems to me a bit desperate. If I don't see a replacement blockbuster on the horizon in the next year or two, I'm selling my shares.

Last up is Dow legend General Electric. The company is the oldest Dow component, and one of the highest yielders. Unfortunately, they had to give up their dividend aristocrat status in 2008 with an unfortunate dividend slashing, but even after that they remain one of the highest-yielding Dow stocks today. They didn't waste any time getting back in the shareholder-rewarding saddle, though, and raised their dividend in January from $0.15 to $0.17.

Even better dividends?
While the Dow does house some great dividends, with only 30 components, it's limited in its offering. If you're looking for even more dividend picks, I invite you to read The Motley Fool's special free report: "Secure Your Future With 11 Rock-Solid Dividend Stocks." Our analysts have outlined their favorite dividend stocks to reward shareholders for years to come. The report is free today, but won't be forever, so click here to access your copy now.

At the time this article was published Austin Smith owns shares of Pfizer. Motley Fool newsletter services have recommended buying shares of Pfizer. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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