Investors who are hungry for dividend-paying stocks that can be relied on will want to turn their attention toward the Dow Jones Industrial Average (^DJI 1.18%). It’s a great place to start looking for streams of passive income.
Entry into the index is limited to well-established and nationally important businesses that can produce steady profits during both bull markets and prolonged economic downturns. However, such qualities aren’t always permanent. For example, the index ejected Walgreens Boots Alliance this February. The pharmacy chain operator’s underlying businesses have performed so poorly in recent years that the company could sell itself to a private equity firm.
The average trailing dividend yield among the 30 stocks that make up the Dow Jones Industrial Average is an uninspiring 1.9% at recent share prices. Two of the 30 don’t distribute dividends at all. However, there are a couple of stocks in the index with yields more than twice that rate: Verizon Communications (VZ -0.10%) and Chevron (CVX 1.20%), both of which have tumbled by more than 10% in recent weeks. Those lower share prices have enhanced their yields, but do the companies have what it takes to maintain their payout-raising streaks?
1. Verizon
From a peak in early October through Dec. 18, shares of Verizon fell by 11%, but its dividend hasn’t been cut. In September, the company raised its payout for the 18th consecutive year. At recent share prices, it offers new shareholders a great big 6.7% yield — and the confidence that comes with owning a piece of the largest member of America’s three-way telecommunications oligopoly.
Verizon’s stock price has been beaten down because its revenue has been stagnating. Relatively tepid demand for new iPhones took a toll on its wireless equipment sales, which fell by 8.1% year over year to $5.3 billion in the third quarter.
Sinking hardware sales are disappointing, but there’s little that Verizon can do about consumers’ general lack of interest in upgrading their smartphones when models barely change from year to year. However, investors will be glad to know the wireless services it provides are still increasing in popularity. Its wireless service revenue rose 2.7% year over year in Q3 to $19.8 billion.
Verizon finished September with $121.4 billion in net unsecured debt. That’s a heavy load, but it isn’t completely out of control. The company has brought its net unsecured debt down to 2.5 times its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA).
Before rushing out to invest in Verizon for the dividend, you should know that it intends to acquire Frontier Communications for $20 billion in early 2025. Broadband internet has been a strong growth driver for Verizon and its peers. Acquiring Frontier will add millions of fiber optic connections to its network, but the extra debt Verizon will take on could force it to lower its dividend payout in another year or two. Income-seeking investors will want to see the company achieve significant debt reduction following the Frontier buyout before taking a big chance on this stock.
2. Chevron
Declining oil prices have been tough on energy stocks, including the second-highest-yielding member of the Dow Jones Industrial Average. When the market closed on Dec. 18, Chevron was down 13% from the peak it reached in April.
Oil prices have gone through a lot of rough patches over the past few decades, but none have lasted long enough to prevent this well-run energy business from maintaining its dividend-hiking streak. In February, Chevron raised its payout for the 37th year in a row. At recent prices, it offers a 4.6% yield.
Management has raised the payout by a total of 26% over the past five years. Instead of making sharper payout raises during times of plenty, Chevron regularly returns cash to its investors via share buybacks. It has repurchased enough to reduce its outstanding share count by 5.3% over the past five years, which makes its payout much easier to maintain.
Verizon’s debt load could make further dividend raises challenging for it, but investors don’t have to worry about Chevron’s balance sheet. Over the past year, the company earned more than five times the amount it needed to cover its interest expenses. Adding some shares of this energy giant to a well-diversified portfolio will likely produce heaps of passive income for patient investors.
Cory Renauer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chevron. The Motley Fool recommends Verizon Communications. The Motley Fool has a disclosure policy.
