BOSTON ( TheStreet) -- The Dow Jones Industrial Average has outpaced the S&P 500 Index and Nasdaq Composite in 2011, perhaps indicating that high-quality stocks are taking the lead in this maturing bull market. The following five dividend-paying Dow stocks, still undervalued on a historical basis and relative to peer investments, are safe bets as the economy strengthens. Below, the stocks are ordered by forward earnings multiple.

Content on this page requires a newer version of Adobe Flash Player.

Get Adobe Flash player

5. Chevron ( CVX) is an integrated oil and gas company, with exploration, production and refining operations. Chevron is still remarkably cheap, despite ranking as the best-performing Dow stock of 2011 so far, with a 19% gain. It trades at a trailing earnings multiple of 11, a forward earnings multiple of 9, a book value multiple of 2.1, a sales multiple of 1.1 and a cash flow multiple of 6.9, 56%, 35%, 59%, 55% and 25% discounts to oil and gas industry averages. Its PEG ratio, a measure of value relative to growth, of 0.6 demonstrates a 40% discount to fair value.

Chevron's fourth-quarter net income surged 72% to $5.3 billion, or $2.64 a share, as revenue gained 9.3% to nearly $50 billion. Its gross margin widened from 21% to 24% and its operating margin expanded from 10% to 13%. Chevron held $17 billion of cash and $11 billion of debt at quarter's end, for a quick ratio of 1.3, a debt-to-equity ratio of 0.1 and a net cash position of $5.6 billion. Chevron receives "buy" calls from 75% of analysts in coverage, indicating optimism.

Bullish Scenario: Credit Suisse forecasts that Chevron will rise 20% to $130 in 12 months.

Bearish Scenario: JPMorgan predicts that the stock will fall 14% to $93 during 2011.

Content on this page requires a newer version of Adobe Flash Player.

Get Adobe Flash player

4. Pfizer ( PFE) is a global pharmaceutical company, designing, manufacturing and selling drugs. Pfizer's stock has risen 16% in 2011, ranking as the third best-performing Dow stock. Yet, it remains undervalued on an absolute and comparative basis. Pfizer sells for a trailing earnings multiple of 20, a forward earnings multiple of 8.9, a book value multiple of 1.9 and a sales multiple of 2.4, 24%, 15%, 63% and 21% discounts to drug industry averages. Its PEG ratio, at 0.2, indicates an 80% discount to estimated fair value, based on long-term growth estimates.

Pfizer's fourth-quarter net income more than tripled to $2.9 billion, or 36 cents a share, as revenue grew 6.3%. The gross margin narrowed from 81% to 80% and the operating margin contracted from 21% to 20%. Pfizer carried $28 billion of cash and $44 billion of debt at quarter's end, for a quick ratio of 1.5 and a debt-to-equity ratio of 0.5. Of the researchers following Pfizer, 21, or 70%, advocate purchasing its shares, seven suggest holding and two say to sell.

Bullish Scenario: JPMorgan ranks Pfizer "overweight", expecting a gain to $25 within 12 months.

Bearish Scenario: Citigroup rates Pfizer "hold", forecasting a marginal drop to $20.

Content on this page requires a newer version of Adobe Flash Player.

Get Adobe Flash player

3. Merck ( MRK), like Pfizer, is a pharmaceutical company. Merck's stock has dropped 8.3% in 2011, underperforming equity benchmarks. It is cheap on a relative basis and currently ranks as the third highest-yielding Dow component, with an annual payout of 4.6%. Merck trades at a forward earnings multiple of 8.7, a book value multiple of 1.9, a sales multiple of 2.2 and a cash flow multiple of 9.5, 18%, 62%, 27% and 20% pharmaceutical peer discounts. Its PEG ratio of 0.1 signals a huge 90% growth discount.

Merck swung to a fourth-quarter net loss of $532 million, or 17 cents a share, from a year-earlier profit of $6.5 billion, or $2.35. Revenue increased 20% to $12 billion. The gross margin fell from 91% to 85%, but the operating margin stretched from 23% to 28%. Merck held $12 billion of cash and nearly $18 billion of debt at quarter's end, for a quick ratio of 1.3 and a debt-to-equity ratio of 0.3. The stock receives "buy" calls from 67% of researchers in coverage.

Bullish Scenario: Credit Suisse values Merck's stock at $44, implying 33% upside over 12 months.

Bearish Scenario: Jefferies rates Merck "hold", expecting a drop of roughly 10% in the next year.

Content on this page requires a newer version of Adobe Flash Player.

Get Adobe Flash player

2. JPMorgan Chase ( JPM) is a diversified financial-services company. JPMorgan's stock has appreciated 9.1% in 2011, outpacing the S&P 500. JPMorgan recently gained approval from federal regulators to boost its dividend from 5 cents to 25 cents. Assuming sustainability, the stock now yields 2.6%, increasing in relevance to income-oriented investors. It remains undervalued, trading at a trailing earnings multiple of 12 and a forward earnings multiple of 8.4, respective discounts of 14% and 24% to industry averages. It's expensive based on cash flow.

The bank's fourth-quarter net income increased 47% to $4.8 billion and earnings per share stretched 51% to $1.12, helped by a smaller float. Revenue climbed 12% to nearly $30 billion. The gross margin jumped from 60% to 78% and the operating margin widened from 33% to 48%. The bank held $272 billion of cash and $617 billion of debt at quarter's end. JPMorgan ranks as analysts' favorite Dow stock, receiving positive reviews from 84% of researchers.

Bullish Scenario: Oppenheimer & Co. expects JPMorgan to rally 32% to $61 over 12 months.

Bearish Scenario: Nomura forecasts a more modest climb of 8% to $50 within the next year.

Content on this page requires a newer version of Adobe Flash Player.

Get Adobe Flash player

1. Hewlett-Packard ( HPQ) makes computer hardware and servers. HP's stock has dropped 2.6% in 2011, lagging U.S. indices. HP is the cheapest Dow dividend stock on the basis of forward earnings. It sells for a trailing earnings multiple of 11, a forward earnings multiple of 7.2, a book value multiple of 2.2, a sales multiple of 0.7 and a cash flow multiple of 7.1, 45%, 49%, 52%, 77% and 42% discounts to computer and peripherals peer averages. Its PEG ratio of 0.3 indicates a 70% discount to estimated fair value.

HP's fourth-quarter net income grew 16% to $2.6 billion and earnings per share increased 26% to $1.17, boosted by a lower share count. Revenue ascended 3.6% to $32 billion. The gross margin extended from 26% to 27%, but the operating margin remained steady at 10%. HP held $9.9 billion of cash and $20 billion of debt at quarter's end, for a quick ratio of 0.7 and a debt-to-equity ratio of 0.5. It receives "buy" ratings from 74% of analysts.

Bullish Scenario: Citigroup forecasts that the stock will rise 58% to $65 over the next 12 months.

Bearish Scenario: Goldman Sachs values HP at $38, suggesting 7% of downside in the next year.

-- Written by Jake Lynch in Boston.

RELATED STORIES:

Become a fan of TheStreet on Facebook.

Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.

If you liked this article you might like

Quick Tips: Now What Should Investors Do?

Quick Tips: Now What Should Investors Do?

Jim Cramer: These 4 Stocks Seem Attractive Right Here

Jim Cramer: These 4 Stocks Seem Attractive Right Here

These 5 Dow Stocks Are Already in Correction in 2018

These 5 Dow Stocks Are Already in Correction in 2018

Volatility Is Still in Charge: Cramer's 'Mad Money' Recap (Friday, 2/9/18)

Volatility Is Still in Charge: Cramer's 'Mad Money' Recap (Friday, 2/9/18)

Chevron Could Be At Bargain Prices for Experienced Traders

Chevron Could Be At Bargain Prices for Experienced Traders