10 Dow Jones Dividend Leaders

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 |  Includes: DD, GE, INTC, JNJ, MDLZ, MRK, PFE, T, TRV, VZ
by: MyPlanIQ

We continue to work on a series of selections of the Dow Jones Industrial Average. The Dow is made up of only 30 stocks which make up more than a quarter of the U.S. stock market. Given that we are in troubled times and the large companies are going to be the ones that will best weather out the storms, we are looking for and grading filters that help us to come up with stock selection ideas.

John Maxfield of the Motley Fool has done some interesting research where he selected and ranked what are arguably the Dow's 10 best dividend-paying stocks.

1. Rank by screening for the Dow's 10 best-yielding stocks:

Company

Dividend Yield

AT&T (NYSE: T) 5.89%
Verizon Communications (NYSE: VZ) 5.37%
Merck (NYSE: MRK) 4.64%
Pfizer (NYSE: PFE) 4.23%
DuPont (NYSE: DD) 3.66%
General Electric (NYSE: GE) 3.63%
Intel (Nasdaq: INTC) 3.57%
Johnson & Johnson (NYSE: JNJ) 3.54%
Kraft Foods (NYSE: KFT) 3.28%
Travelers(NYSE: TRV) 3.24%
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Source: Yahoo! Finance (as of Oct. 17, 2011).

2. Ranked and scored according to sustainability, predictability, and general quality:

  • Sustainability -- dividend's size relative to free cash flow per share.
  • Predictability -- when the company started paying a dividend.
  • Quality -- leverage the Fool's CAPS scores

3. Add up and rank the scores:

Company

FCF Payout Ratio (Points)

Year Started Paying Dividends (Points)

Caps Rating (Points)

Total Points

General Electric 26% (10) 1899 (9) 4 (8) 27
Pfizer 28% (8) 1939 (6) 4 (8) 22
Johnson & Johnson 48% (5) 1944 (5) 5 (10) 20
DuPont 59% (3) 1904 (8) 4 (8) 19
Merck 52% (4) 1935 (7) 4 (8) 19
Travelers 27% (9) 1990 (3) 3 (6) 18
AT&T 70% (2) 1881 (10) 3 (6) 18
Verizon Communications 47% (6) 1984 (4) 4 (8) 18
Intel 43% (7) 1992 (2) 4 (8) 17
Kraft Foods 131% (1) 2001 (1) 4 (8) 10
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Source: S&P Capital IQ, DividendInvestor.com, and Motley Fool CAPS (as of Oct. 13, 2011). FCF payout ratio uses operating cash flow less capital expenditures as measure of free cash flow.

There are three benefits to using this filter

  1. Using Dow stocks, we know that these are all large organizations
  2. Dividends are an important component and often reflect well run companies
  3. We want to be aware of companies using dividends as a means of attracting investors but where performance might be weak

Hopefully this filter will enable us to sort out which look like a good investment.

We will compare this with out reference dividend bearing ETF portfolio.

Asset Fund in this portfolio
REAL ESTATE ICF (iShares Cohen & Steers Realty Majors)
CASH CASH
FIXED INCOME TIP (iShares Barclays TIPS Bond)
Emerging Market VWO (Vanguard Emerging Markets Stock ETF)
US EQUITY DVY (iShares Dow Jones Select Dividend Index)
US EQUITY VIG (Vanguard Dividend Appreciation ETF)
INTERNATIONAL EQUITY IDV (iShares Dow Jones Intl Select Div Idx)
High Yield Bond HYG (iShares iBoxx $ High Yield Corporate Bd)
INTERNATIONAL BONDS EMB (iShares JPMorgan USD Emerg Markets Bond)
Click to enlarge
Portfolio Performance Comparison
Portfolio/Fund Name 1Yr AR 1Yr Sharpe 3Yr AR 3Yr Sharpe 5Yr AR 5Yr Sharpe
Retirement Income ETFs Tactical Asset Allocation Moderate 3% 20% 10% 79% 8% 60%
Retirement Income ETFs Strategic Asset Allocation Moderate -1% -5% 15% 81% 2% 7%
Dow Jones Dividend Leaders 6% 35% 15% 71% 2% 3%
Click to enlarge

As I review the table, I think that this is a very interesting set of returns. Bear in mind that with our simulations, we reinvest the dividends (we are working on splitting out the dividends separately) so some of the additional returns will be dividends that can be taken for income. I think that this is a very interesting approach that is worth consideration.

Three Month Chart One Year Chart Three Year Chart Five Year Chart

More...

As I compare this selection with the buy and hold approach for the dividend ETF portfolio, I think that there is some real merit here. This is a simple-to-administer approach and could be the basis of a core portfolio for those who are looking for stability and income. In the next article, we will dig into the rankings to see if we can improve the returns a little.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.