RD's Picks

Yesterday I heard someone on a CNBC show mention that the yield on the Dow Jones Industrial Average was higher than 10-year treasuries. Decided to check and it's true. At today's closing, a portfolio equally weighted across the thirty DJIA stocks would have a dividend yield of 3.77% compared to the 10-year at 3.63%. I used the dividends for the DJIA stocks as reported on Yahoo, except the payout for Bank of America (BAC) was adjusted to account for their recent announcement halving the dividend.

The individual dividend yields range from a high of 8.89% for Citigroup (C) to a low of 0.8% for Hewlett Packard (HPQ). Thirteen of the thirty stocks have higher yields than the 10-year. Some of those high yielders are in troubled industries or may have difficulty maintaining the payout. However, a number of the stocks topping the payout for 10-year treasuries aren't in the financial business, are profitable and have solid businesses. Examples include McDonalds (MCD), Kraft (KFT), Home Depot (HD), DuPont (DD), Alcoa (AA), and Merck (MRK). For those willing to venture into banks that have mostly stayed out of trouble, JP Morgan (JPM) tops the 10-year. Chevron (CVX), Caterpillar (CAT), 3M (MMM) and Intel (INTC) are within a quarter point of the 10-year. You may not agree with the 'solid business' comment for all these names, but the point is there are companies in a number of sectors with very attractive yields. Many of them have the wonderful habit of raising the dividend year after year after year.

I also did a quick scan of cash and debt levels for many of the DJIA 30. An investor who wants to protect against the risk of credit tightening has several DJIA companies to choose from that have more cash than debt. That insulates them from needing to tap the credit markets and in some cases they could extend credit to their customers if needed to keep operations moving. Names include HPQ, ExxonMobil (XOM), CVX, Microsoft (MSFT), MRK, and INTC. Johnson and Johnson (JNJ) just misses being net cash positive. I had expected MSFT to top the net cash rankings, but it was a distant second among the DJIA stocks to XOM. Note to XOM CEO Rex Tillerson - $30 billion net cash? Buy a company, raise the dividend, put some of that cash to work!

I suspect a number of factors other than tight credit markets are pulling the stock market lower. Business news reports have covered hedge funds selling to meet redemptions. Retail investors have probably been scared into redeeming mutual fund shares. Both of those scenarios force fund managers to sell regardless of the market price driving indexes lower and scaring more investors into redeeming. Many buyers are probably sitting on the sidelines waiting for some sign that the worst is over and for clarity about government interventions. I have no clue when the worst will be over, but there are some good bargains out there for income investors.

The Dow Jones is certainly not the only place to look for good dividend yields. They're out there and it's a good time to start looking at what Mr. Market has put out on the clearance aisle.

Disclosure: At time of posting, I'm long MCD and CVX, but have no position in any other company mentioned.

Comments: View Comments |  Wednesday October 8, 2008