Investors looking for dividend stocks with reasonable valuations have come to the right place.
The Dow Jones Industrial Average (^DJI 0.09%) includes 30 leading industry components that represent the U.S. economy. This index has a rich history, making it the go-to stock for investors looking for quality stocks that can help generate dividend income.
Over time, the composition of the Dow has changed to reflect the growing influence of technology on the economy, which has contributed to its impressive rise in recent years. But even Dow Jones Industrial Average stocks like Coca-Cola, Home Depot and McDonald’s have soared in recent months, helping the index hit a new all-time high on Oct. 11.
Despite the Dow’s track record, not all of its components have high yields or are reliable dividend stocks. Boeing’s challenges have led to pressure on the company to suspend its dividend. Tech stocks like Microsoft, Apple and Salesforce have yields of less than 1%, and Amazon doesn’t pay a dividend.
Johnson & Johnson (JNJ 0.40%), Dow (DOW 0.06%), and Chevron (CVX -0.30%) are three of the highest yielding stocks in the index. If you invest $2,500 in each stock, the average yield is 4.2% and you should be able to earn at least $300 in passive income per year. Here’s why all three high-dividend stocks are worth buying now.
Image source: Getty Images.
J&J has been tackling significant challenges in recent years
Johnson & Johnson (J&J) is the dividend king, having increased dividends for 62 consecutive years. The company has long been known as a cheap passive income powerhouse. However, as reflected in the slump in stock prices, the past few years have been difficult.
J&J has been a leader in COVID-19 vaccine development, which initially benefited the company. But a sharp decline in vaccine demand has been holding the company back, with J&J now reporting much of its results “excluding the impact of COVID-19 vaccines.”
Another challenge is adjusting to the August 2023 spinoff of J&J’s consumer health business. Former J&J brands such as Band-Aid and Tylenol are now under the new organization Kenvue. The spinoff should make J&J a faster-growing company focused on just two areas: innovative medicine and medtech. But it removes some of the safe, solid parts of the business that made J&J a rock-solid dividend stock, regardless of business cycles.
Finally, J&J is fighting a lawsuit alleging that its talc-based products led to the development of cancer. J&J reorganized into a subsidiary called Red River Talc LLC and filed for Chapter 11 bankruptcy protection on September 20 to handle current and future claims.
After a tumultuous few years, J&J is finally ready to turn the corner. The business has been performing well and is growing at a rate that will support future dividend increases. J&J generates significant amounts of free cash flow that can easily cover its dividend costs. Additionally, J&J’s yield of 3.1% stands out compared to the S&P 500’s dividend yield of just 1.2%.
The Dow is a coiled spring for economic growth
Do not confuse it with the Dow, the Dow Jones Industrial Average. Dow produces chemicals used in plastics, seals, foams, gels, adhesives, resins, coatings and more. The commodity chemical company has three main segments: packaging and specialty plastics, industrial intermediates and infrastructure, and functional materials and coatings.
Dow’s business model is capital intensive and subject to the ebbs and flows of global supply and demand. The Dow has been hit hard by lower volumes and lower profit margins. In the chart below, you can see that revenue and profit surged in 2021 and early 2022, but have declined significantly since then. Similarly, the stock price has barely fallen since the spinoff.
DOW data by YCharts.
Dow cited macroeconomic factors as the main reason for the weak performance. However, low interest rates could significantly benefit many of the company’s end markets. For example, lower mortgage rates could boost demand for housing, which could support Dow’s polyurethane and construction chemicals businesses. Lower interest rates may also increase demand for durable goods.
Overall, the Dow is well-positioned for strong earnings growth next year. Analyst consensus estimates call for earnings per share (EPS) of just $2.26 in 2024, compared to $3.55 in 2025. Looking at earnings trends, the Dow Jones Industrial Average seems expensive, but if it meets expectations, it will be a much more reasonable valuation.
Despite fluctuations in Dow’s performance, Dow has proven to be a reliable income stock independent of DowDuPont in 2019. The Dow has a yield of 5.2%, making it the second-highest yielding stock in the Dow Jones after Verizon Communications. Dow has not increased its dividend since the spinoff, but it has included stock buybacks as part of its capital return program. The company’s goal is to return 65% of profits to shareholders through share buybacks and dividends, providing enough dry powder to fund long-term investments such as new production plans and low-carbon initiatives. The goal is to ensure that
Overall, the Dow is a stock worth considering for income investors right now.
Good energy stocks with high yields
Like the Dow, Chevron is a highly cyclical company whose performance is highly influenced by commodity prices. But Chevron has a strong balance sheet, a diversified upstream business that doesn’t rely on a single production region, a large refining operation, and a track record of raising its dividend regardless of oil price movements.
In fact, Chevron has paid and increased its dividend for 37 consecutive years. Chevron’s yield is 4.3%, the third-highest yield in the Dow. The company’s track record of increasing dividends and its high yield make it one of the top passive income earners among the Dow constituents.
Investors worried about falling oil prices can take comfort in knowing that Chevron has a large margin of error to back up its dividend. Chevron’s capital spending and stock buybacks are near the highest levels in five years. If oil prices spike, Chevron can simply suspend stock buybacks and reduce capital spending. Chevron didn’t cut its dividend even when oil prices collapsed in 2020, so it stands to reason that even considering a dividend cut would require a prolonged economic downturn.
Chevron stands out as a well-rounded buy for investors looking for a safer way to invest in oil and gas and enhance their passive income streams.
John Mackey, former CEO of Amazon subsidiary Whole Foods Market, is a member of the Motley Fool’s board of directors. Daniel Felber has no position in any stocks mentioned. The Motley Fool has positions in and recommends Amazon, Apple, Chevron, Home Depot, Kenvue, Microsoft, and Salesforce. The Motley Fool recommends Johnson & Johnson and Verizon Communications and recommends the following options: A long January 2026 $13 call on Kenvue, a long January 2026 $395 call on Microsoft, and a short January 2026 $405 call on Microsoft. The Motley Fool has a disclosure policy.
