Should You Buy the 3 Highest-Paying Dividend Stocks in the Dow Jones?

The Dow Jones Industrial Average (^DJI) is among the most closely followed stock indexes in the world. With a limited number of companies in its lineup, it features a selection of large and influential enterprises, making it a potential goldmine for dividend investors seeking high-yield stocks. But the question remains: are the top three dividend-yielding stocks in this index worth the investment?

1. Verizon: A Dependable High-Yield Stock with Elevated Debt

One of the attractive aspects of Verizon Communications (VZ) is its substantial dividend yield, which currently stands at 6.2%. This payout is significantly higher than the 1.2% yield associated with the S&P 500 (^GSPC), often regarded as the most observed index in the financial world. Additionally, Verizon has a strong track record, consistently raising its dividend for over twenty years.

However, there is a concern regarding its financial situation. Verizon's debt-to-equity ratio is at 1.45, notably higher than its closest competitor, AT&T (T), which has a ratio of 1.18, and T-Mobile US (TMUS), at 1.28. This elevated leverage is crucial because constructing and maintaining a cellular network requires significant investment, and high debt may limit Verizon's flexibility to compete effectively.

Investors face a decision about the risk versus reward. With approximately 57% of Verizon's free cash flow allocated to dividends in 2024, the company seems capable of sustaining its attractive yield. Nevertheless, if you decide to invest, it would be wise to monitor its debt closely.

2. Chevron: An Enticing Dividend in a Volatile Sector

Next on the list is Chevron (CVX), which offers a dividend yield of 4.5%. The company operates as an integrated energy giant, engaging in activities ranging from oil and gas drilling (upstream) to refining and chemicals (downstream). This diversification shields the company from some of the extreme fluctuations of the energy market.

A significant achievement for Chevron is its remarkable 37-year streak of annual dividend increases. This history is evidence of a resilient business model, capable of navigating the ups and downs of oil and gas prices while benefitting shareholders.

Chevron's financial position is also robust, with low leverage, allowing it to incur debt when necessary during tough times to uphold its business and dividend commitments. Historically, when the oil market stabilizes, Chevron manages to pay down its debt, preparing itself for future challenges. If you are on the lookout for an energy stock offering dividends, Chevron is an excellent choice and demonstrates stability.

3. Merck: A Solid Business with Recent Valuation Appeal

Merck (MRK), one of the leading pharmaceutical companies, produces vital medications within oncology, vaccinations, and animal health, among others. With projected sales of $64.2 billion in 2024, Merck is undeniably a dominant player in healthcare. It also provides a dividend yield of 3.4%, which is appealing.

Many traditional valuation metrics, such as price-to-sales and price-to-earnings ratios, suggest that the stock is currently trading below its five-year average. While Merck hasn't raised its dividend every single year, its payouts have generally increased over time, making it a solid option.

However, the current dividend yield is only around average for Merck, compared to its historical range, which might lead some dividend hunters to pause before purchasing. Observing the stock for a potential price dip could be prudent, as it often presents better buying opportunities for income-focused investors.

Should You Invest in All Three High-Yield Dow Stocks?

Ultimately, no matter which of these stocks you consider investing in, there are valuable qualities to be found in each. While Verizon has debt concerns that need monitoring, it has adeptly managed its finances over the years. Chevron may operate in a volatile market but has consistently proven itself as a dependable dividend payer. Merck’s yield may not be at its historical peak, but it remains a strong candidate at an attractive valuation.

Each of these stocks presents unique investment opportunities, making them worthy additions for your portfolio.

stocks, dividends, investing