In the spirit of the Olympics, I awarded gold, silver, and bronze virtual medals to the top Dow Jones Industrial (DIA) stocks. I took the top 10 dividend paying stocks in the Dow Jones Index (known as the Dogs of the Dow) and ranked them by the highest total yield as defined by the highest dividend yield plus the highest expected five-year annual earnings growth. The combination of dividends and expected earnings growth should provide a gauge as to how well the stocks will perform over time. Investments in these companies should double approximately every five years if the dividends are reinvested.
Standing on the highest platform with the gold medal is General Electric (GE) with a 3.3% dividend and 5-year expected annual earnings growth of 12.63% for a total yield of 15.93%. GE is a highly diverse company with segments in Energy, Aviation, Healthcare, Transportation, Home and Business, and GE Capital.
GE has a strong order backlog of $204 billion ($152 billion in services and $52 billion for equipment). This will allow the company to deliver double-digit growth for 2012 and beyond.
The company has a forward PE ratio of 12, a PEG of 1.07, and a price to book ratio of 1.83. These figures give the stock an attractive valuation for the long-term. GE has a healthy profit margin of 9.26% and an operating margin of 9.55%. Its trailing 12 month operating cash flow is $32.4 billion and free cash flow is $19 billion. The company's diversity among many segments gives it manageable risk as strong segments make up for the weaker ones.
The silver medal goes to Verizon Communications (VZ) with its 4.5% dividend and 5-year expected annual earnings growth of 10.64% for a total yield of 15.14%. The company has been expanding its FiOS service for TV, phone, and internet. It now has 94.2 million retail customers. In addition to expanding FiOS, Verizon has also recently added 46 cities for its 4G LTE service to bring its total market count to 337, covering about 75% of the U.S. population.
Verizon is fairly valued with a forward PE ratio of 16, a PEG of 1.69, and a price to book ratio of 3.45. The trailing twelve month operating cash flow is $32.26 billion and free cash flow is $11.65 billion. Verizon's strong cash flow allows it to continue its generous dividend.
There is a tie for the bronze medal: Intel (INTC) and AT&T (T). The reason I chose to have a tie is because both companies have generous dividends with solid earnings growth that is similar in total annual yield.
Intel pays a dividend of 3.5% and has 5-year expected annual earnings growth of 11.86% for a total annual yield of 15.36%. The company is benefitting from multiple product introductions in ultrabooks and smartphones and from strength in the data center.
Intel is undervalued with a forward PE ratio of 10.13, a PEG 0.91, and a price to book ratio of 2.65. It looks like a good time to start a position in the stock for the long-term. This company is another cash flow machine with a trailing twelve month operating cash flow of $19.9 billion and free cash flow of $8.9 billion.
AT&T is the highest Dow Jones dividend yielder with a dividend of 4.7%. The company has a 5-year expected annual earnings growth of 9.86%, which when combined with the dividend provides a total annual yield of 14.56%. AT&T is thriving with a strong wireless business, smartphone sales, branded computing (tablets, tethering plans, etc.), TV, and internet service.
AT&T is fairly valued with a forward PE ratio of 14.65, a PEG of 1.6, and a price to book ratio of 2.13. The company has a trailing twelve month operating cash flow of $34.7 billion and free cash flow of $14.4 billion. AT&T does a good job of balancing its company growth while simultaneously rewarding shareholders.
Conclusion:
These companies all generate solid cash flow which is shared with their shareholders. While their dividends alone are great, these companies also have significant expected earnings growth. Earnings growth is what drives stock prices higher over time. Therefore, investors of these companies stand to benefit from the dividend/earnings growth combination which in essence is regular cash payouts plus stock appreciation. Investors can reasonably expect investments in these companies to double in five years provided the dividends are reinvested.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
