NEW YORK (TheStreet) -- The Dow Jones Industrial Average is made up of 30 blue-chip stocks, and it's weighted to represent the various industries in the U.S. economy in proportion. All 30 of those stocks pay dividends. We've systematically ranked them to show you the 10 best dividend stocks in the Dow.
The criteria we used (primarily drawn from The 8 Rules of Dividend Investing) were:
- Total return
- Payout ratio
- Dividend yield
- Historical growth rate
- Price-to-earnings ratio
- Stock price standard deviation & beta
Our aim was to find a particular type of equity: high-quality dividend growth stocks with strong competitive advantages suitable for long-term investors.
No. 10: Verizon Wireless
Verizon Wireless has 34% market share of the U.S. wireless industry. Between them, Verizon, AT&T (T) - Get Report , T-Mobile (TMUS) - Get Report , and Sprint have captured more than 90% of the market. When an industry is controlled by only a few large players, there is not enough competition to drive down prices for customers. As a result, higher profits tend to accrue to the largest.
Verizon Wireless stands out from the other Dow stocks thanks to its high dividend yield of 4.6% -- it pays out 62% of its profits as dividends. The company has paid steady or increasing dividends for 31 consecutive years. This history and its leadership in the oligopolistic United States telecommunications industry make it likely shareholders will continue to see rising dividends.
Verizon Wireless recently announced it will acquire AOL (AOL) to enhance its mobile video offerings. AOL owns TechCrunch and The Huffington Post, among other high-quality Web sites, which is another of the driving rationales for the acquisition.
Verizon Wireless is expected to compound earnings-per-share at 8% a year going forward. Rising smartphone and data usage are the underlying growth drivers for Verizon. The company offers investors a 12.6% total return from dividends (4.6%) and growth (8%+).
One of the most appealing aspects of Verizon stock is its stable cash flows and low stock price standard deviation -- just 21.7% over the last decade. In addition, the company has a beta of 0.71. When the S&P 500 fell 38% in 2008, Verizon Wireless stock fell only 22.4%.
Verizon Wireless is a high-quality business, currently trading for a forward price-to-earnings ratio of 11.9. The company's stock appears undervalued given its solid expected growth rate, stability, and high dividend yield.
No 9: Cisco
Cisco (CSCO) - Get Report designs, manufactures and sells networking and communications equipment. The company was founded in 1984 and has a market cap of $147 billion. Cisco's market cap briefly went over $500 billion in 2000 during the mania of the tech bubble.
The days of Cisco having an absurdly high price-to-earnings ratio and experiencing rapid growth are gone. Over the last several years, Cisco has transitioned into a reasonably priced dividend growth stock.
Cisco has increased its dividends each year since it began paying them in 2011, and currently has an above-average dividend yield of 2.9% and a payout ratio of 39.1%. The company has a conservative payout ratio and stable cash flows, and management is committed to paying rising dividends.
Over the last decade, Cisco's EPS has grown at 10.3% a year, but it's not likely to repeat that performance in the next one. Cisco's earnings-per-share are expected to grow at between 5% and 7% a year over the next several years. Still, this growth rate, combined with the company's dividend yield, gives investors an expected total return of between 8% and 10% a year.
Cisco's EPS growth over the next several years will come from share repurchases and acquisitions -- it has a cash hoard of around $50 billion to use in those areas -- as well as organic growth. Cisco is focusing its efforts on the cloud, security, and services.
Cisco is a market leader in several networking and communication areas including: ENT routing, SP routing, switching, voice, and wireless LAN, web conferencing, and network security, among others. And with a forward price-to-earnings ratio of just 12.7, the company appears undervalued at this time.
No. 8: Microsoft
Bill Gates is the richest person in the world, and his wealth comes directly from Microsoft (MSFT) - Get Report. Microsoft is one of the largest businesses in the world based on its $372 billion market cap. Microsoft, founded in 1975, is the largest independent software company in the world thanks to the ubiquitous Windows software. The company has expanded beyond selling software. Microsoft sells Nokia phones, Xbox gaming consoles, Surface tablets, and operates the Bing search engine.
Over the last decade, Microsoft has grown earnings per share at 8.7% a year. Growth in the near future will be fueled by the release of Windows 10, an operating system designed to provide a unified experience across phones, tablets and computers. Windows 10 will replace Internet Explorer with the new Microsoft Edge browser, which allows users to take notes on Web pages and share them, among other new features. In addition, Windows 10 users will be able to play games against Xbox users online.
Microsoft's wide diversification helps it to realize stable cash flows. The company has a payout ratio of 50% and has paid steady or increasing dividends each year since 2003, when it started paying them. Investors in Microsoft will likely see continued dividend increases as cash flows increase.
Microsoft's price-to-earnings ratio of 19.1 is close to the S&P 500's average ratio of 20.5. The company's growth is expected to slow somewhat due to the rise of smartphones. On the other hand, Microsoft does have an above-average dividend yield of 2.7%.
The company's rapid growth days are behind it, but Microsoft continues to be a cash flow machine that has shown willingness to return its profits to shareholders through both dividends and share repurchases.
No. 7: ExxonMobil
ExxonMobil (XOM) - Get Report is the largest publicly traded energy corporation in the world, with a market cap of $354 billion. The company is one of the successors to Rockefeller's Standard Oil, and is a dividend aristocrat due to its 32 consecutive years of dividend increases. To qualify as a dividend aristocrat, a stock must have paid increasing dividends for 25 consecutive years or more.
In the short run, ExxonMobil's fortunes are determined in large part by the price of oil. However, even when oil prices are down, ExxonMobil still reaps impressive profits. When crude hit lows near $30 a barrel in 2009, ExxonMobil still made an annual profit of $19 billion.
ExxonMobil's dependence on oil prices makes the company's stock more volatile than most other large-cap businesses with long dividend histories. ExxonMobil has a stock price standard deviation of 25.3% and a beta of 1.
Long-term growth for ExxonMobil will be driven by increasing global energy demand, fueled by rapid economic growth in emerging economies like China, India and Brazil.
Over the last decade, ExxonMobil had compounded earnings-per-share of 4% a year. The company will see weak earnings in 2015 and possibly 2016 due to low oil prices. When oil prices are higher, ExxonMobil typically delivers double-digit EPS growth.
Over the next decade, ExxonMobil shareholders should be prepared for EPS growth anywhere between 3% and 9% a year -- depending primarily on crude prices. That will lead to total returns in the 6% to 12% a year range, from EPS growth (3% to 9%) and dividends (~3%).
No. 6: Intel
The company has paid steady or increasing dividends since 1992. Intel's long streak (for a technology business) of steady or increasing dividends shows that management is committed to rewarding shareholders.
In addition to its long dividend history, Intel also has a low payout ratio of 38.3%, which gives Intel's management room to grow dividends faster than earnings-per-share for several years.
Over the last decade, Intel grew EPS at 10.7% a year. It also repurchased 2.9% of outstanding shares each year from 2007 through 2014. By themselves, the share repurchases combined with its dividend yield of 3% gave investors a shareholder yield of nearly 6%.
Growth over the next decade will likely be somewhat slower for Intel -- predictions are for EPS of between 6% and 10% a year over the next several years. Around 3 percentage points of this growth will come from share repurchases; organic earnings growth will be in the 3% to 7% a year range. Overall, investors can expect returns of 9% to 13% a year going forward from dividends (3%) and EPS growth.
Intel's growth will come from continued improvement in its processors and memory chips. The rise of the Internet of Things will provide favorable tailwinds, with more devices in homes and cars that require Intel's hardware. Intel's IoT division grew revenues 10% in the company's most recent quarter.
One would expect a well-branded industry-leading business that is offering double-digit total returns to trade for a price-to-earnings ratio in excess of the S&P 500's average PE ratio of 20.5. But Intel is only trading at a PE of 13.6. The company looks significantly undervalued at current prices.
No 5: Apple
Apple (AAPL) - Get Report is the largest corporation in the world, with a market cap of $733 billion. Its run over the last 12 years has been nothing short of phenomenal. In 2003, Apple had revenues per share of $1.21. At the end of fiscal 2014, revenues per share were $31.16. That's a gain of 2,475% in 12 years.
It is impossible for Apple to maintain that growth rate. If it continued growing at 30% a year, its annual earnings would surpass current United States GDP in 23 years. Obviously, that's won't happen, but Apple still has excellent growth opportunities from continued releases of iPhones, iPads and the new Apple Watch. It's core Mac products and iTunes will add to growth as well. In total, Apple is expected to grow EPS at around 14% annually over the next several years.
Apple's phenomenal success comes from its reputation for excellent products and its instantly recognizable brand, a competitive advantage that will likely persist and allow the company to generate high margins.
Unlike the other nine best dividend stocks in the Dow, Apple has a below-average dividend yield of 1.5%, and a payout ratio of only 23.1%. The company will likely see double-digit dividend growth over the next several years. Apple has paid increasing dividends each year since 2012, when it started its current dividend plan.
Apple is currently trading at a PE multiple of 15.7. This is significantly lower than the S&P 500's price-to-earnings multiple of 20.5, despite Apple's significantly higher growth rate. Despite everything, Apple stock appears undervalued.
No. 4: Coca-Cola
Coca-Cola (KO) - Get Report is the global leader in ready-to-drink beverages, with 20 brands that generate $1 billion or more per year each in sales. Coca-Cola was founded in 1892 and has a market cap of $174 billion.
Coca-Cola has increased its dividend payments annually for 52 consecutive years, one of the more impressive streaks extant. It's one of only 16 stocks that qualify as Dividend Kings for having increased their dividend payments for 50 consecutive years or more.
Over the next several years Coca-Cola's management expects the company EPS to grow at between 7% and 9% a year. Coca-Cola grew constant-currency EPS at 7% in fiscal 2014.
Coca-Cola's growth will come from several sources. In its non-carbonated business, the company's next big product is Fairlife, a lactose-free milk-based beverage. Coca-Cola is hoping Fairlife does for milk what Simply -- now one of Coca-Cola's billion dollar brands -- did for orange juice.
Growth will also come from further international expansion. Coca-Cola's global distribution system allows it to rapidly scale successful brands internationally. A recent example is FUZE Tea. Introduced in 2012, it is now a billion-dollar brand sold in 40 markets around the world.
Coca-Cola currently has an above average dividend yield of 3.3%. In combinaton with its 7% to 9% expected growth, that gives shareholders an expected return of 10.3% to 12.3% a year. These returns come with low risk. Coca-Cola's stock price standard deviation of 18.6% and beta of just 0.6 are evidence of the company's safety. Stocks with stable cash flows tend to have lower betas and stock price standard deviations, and Coca-Cola has one of the most stable cash flows of any business.
No. 3: IBM
IBM (IBM) - Get Report founded in 1911, is a technology and global information services provider with a market cap of $164 billion. In an industry characterized by such rapid change, it's unusual to see a company consistently performed so well for over 100 years. Warren Buffett has clearly taken notice of IBM's long-term success: It's one of Berkshire Hathaway's largest holdings, representing 12% of its portfolio.
IBM has paid steady or increasing dividends since 1993. The company's stock currently has a 3.1% dividend yield and a payout ratio of just 30.5%. IBM's combination of a conservative payout ratio and long dividend streaks makes it very likely investors will continue to see rising dividend payments from IBM.
Over the last decade, IBM has grown EPS at 13.2% a year. However, as the common investment warning goes, "Past performance is no guarantee of future results."
IBM is expected to see slower growth over the next several years than it did in the last decade, with EPS growth of just 2% to 5% a years as it transitions its business toward new technologies. IBM is investing $4 billion into cloud computing, mobile computing, analytics, and information security to take advantage of growth in these industries. Still, the company's growth will likely be slower than in the recent past due to fierce competition and a rapidly changing marketplace.
Because of this, IBM is trading at a low price-to-earnings multiple of just 10.6. The company appears substantially undervalued at current prices. IBM's dividend yield is the highest it's been in the past 20 years.
Investors in IBM should expect total returns of 5% to 8% a year over the next few years from dividends (~3%) and EPS growth (2% to 5%). Growth could potentially pick up as the company reaps the benefits of its current investments in new technologies, in which case IBM's PE multiple will likely rise significantly, further benefiting shareholders.
No. 2: Travelers
Travelers (TRV) - Get Report is a large property and casualty insurer with a market cap of $31.8 billion. The company was founded in 1853. Travelers has paid increasing dividends each year since 2006.
Travelers operates in the slow-moving insurance industry. Better data and risk information have improved insurance, but the core process of underwriting risk and investing premiums before they are paid out has remained largely unchanged over the last 150-plus years. This stability is one of its biggest positives for long-term investors.
In addition, many types of insurance are mandatory, and there is nothing more beneficial for a business than to have the law require people purchase your product. Travelers benefits from compulsory auto insurance in the United States, as an example.
Travelers currently trades at a price-to-earnings ratio of just 9.7 -- less than half that of the S&P 500's average. One would expect such a low PE ratio might be due to poor growth prospects, but that is not the case with Travelers.
Travelers has grown book-value-per-share at 9.5% annually over the last decade, and is expected to grow at around 7% a year over the next several years. If interest rates rise, Travelers will benefit from the ability to invest premiums into higher yielding securities, boosting profits.
Travelers has a dividend yield of 2.5%. Travelers conservative payout ratio of 21.7% and its commitment to paying rising dividends make it likely investors will continue to see rising dividend payments. Travelers investors can expect total returns of 9.5% a year. The company's low PE ratio and stable business model make Travelers a low-risk investment with solid total return potential.
No. 1: Wal-Mart
Wal-Mart (WMT) - Get Report is the largest discount retailer in the world, and has paid increasing dividends for over 40 consecutive years. The company has obvious strong competitive advantages, yet it trades for a PE multiple of 14.7.
As the low-price leader in retail, Wal-Mart uses its size to pressure suppliers into lowering their prices, then passes savings on to consumers which results in a positive feedback loop.
Wal-Mart stock is cheap right now because growth has slowed. Management has been pouring earnings into long-term growth projects that will not pay off immediately. However, the job of management is to maximize long-term shareholder value, and Wal-Mart's management is taking a long-term view, despite pressure to hit quarterly profit numbers.
First, Wal-Mart is investing in its employees. As of April 2016, all employees will earn at least $10 an hour. Those wage increases will help Wal-Mart retain and hire better employees. In addition, Wal-Mart is investing in more training for its employees to provide better service for customers.
Secondly, Wal-Mart is investing heavily in infrastructure to speed delivery time. Wal-Mart's strong supply chain has always been an advantage for the company. Improving it will result in a net gain for long-term shareholders.
Finally, Wal-Mart is investing heavily in digital capabilities. Wal-Mart Labs is the company's data-science/tech hub based in San Bruno, Calif. Wal-Mart now generates $12 billion in online sales, and they are growing at 17% annually.
Wal-Mart's EPS has grown at 6.25% a year over the last decade. The company's growth has slowed significantly since 2011 as it has struggled through negative publicity around its low wages, stocking issues, and poor store cleanliness.
Wal-Mart's growth will likely be mediocre through 2015 and potentially 2016. Over the long run, the company should return to earnings-per-share growth between 6% and 10% a year. Growth will come from comparable store sales increases (1% to 3% a year), new store openings (1% to 2% a year), efficiency gains (1% to 2% a year), and share repurchases (~3% a year).
Wal-Mart's mix of expected growth, value, dividends and stability make it a favorite of The 8 Rules of Dividend Investing. The company is a buy for any dividend growth investor looking for exposure to discount retail.
This article is commentary by an independent contributor. At the time of publication, the author held XOM and WMT.