The three best dividend stocks in the Dow Jones index

Investing in dividend stocks within the Dow Jones Industrial Average (DJIA) has attracted the attention of many investors looking for stable income. The DJIA includes only 30 selected companies and weights stocks by price, a unique approach compared to other indices. Despite some peculiarities, the DJIA is considered an important market indicator and investment strategies such as the Dogs of the Dow method are often tied to it.

Currently, the three top dividend yielding stocks in this index are Verizon, Dow and Chevron. At first glance, high dividend yields may be tempting, but a closer look reveals some of the risks and challenges that these companies entail.

Verizon - Stable telecom giant, but highly leveraged

Verizon $VZ is a key player in the U.S. telecommunications industry whose customers remain loyal thanks to long-term contracts and regular monthly service payments. Verizon's current dividend yield is approximately 6.5%, which is attractive for income-oriented investors. The company has raised its dividend every year for the past 20 years, but future growth may slow due to several challenges.

In fact, one reason for the high yield is the expected decline in growth. The U.S. telecom market is saturated, so growth is likely to come primarily from price increases, but these are limited. Verizon also faces high costs for infrastructure investments, which are necessary to stay competitive in a highly competitive market. With the high debt it has relative to its closest competitors, it is in a situation where it may be harder to adjust investments and growth going forward.

Dow - Chemical giant with a fixed but stagnant dividend

Dow $DOW, known for manufacturing chemical products, has been struggling with the market volatility that characterizes the energy sector from which it draws its feedstock. The prices of feedstock and products are volatile, which can have a major impact on the stability of the company's revenues and earnings. Dow has found a solution to deal with this volatility - starting in 2019, it will pay a quarterly dividend of $0.70 per share, which it considers a sustainable amount in the face of cyclical fluctuations.

Dow's current dividend yield is 5.59%, but long-term investors should not expect a dividend increase. That said, any increase in yield will reflect market sentiment and overall sector performance rather than dividend growth. For investors focused on long-term dividend growth, this stagnation may make the Dow no longer an attractive option.

Chevron - A stable player in a volatile energy sector

Chevron $CVX, one of the largest integrated oil giants, operates in the upstream, midstream, and downstream oil and gas sectors. The company's integrated structure provides it with greater stability within the energy sector, but the risk of volatility does not completely disappear. Chevron's current dividend yield is approximately 4.3%, which is appealing to investors seeking stable dividend income.

Chevron is able to manage through difficult periods thanks to its strong balance sheet. The debt-to-equity ratio is just 0.15, giving the company the ability to finance itself during oil price downturns and ensure dividend stability even in adverse periods. In addition, Chevron has increased its dividend every year for 37 years, demonstrating its emphasis on shareholder remuneration.

Disclaimer: You will find a lot of inspiration on Bulios, but stock selection and portfolio construction is up to you, so always do a thorough analysis of your own.

Source: TheMotleyFool