Time to Pounce: 2 High-Yielding Dow Stocks That Are Begging to Be Bought Right Now

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For more than a century, Wall Street has been nothing short of a wealth-building machine. Even taking into account the numerous corrections, bear markets, and even occasional crashes that equities have endured, the average annual return of stocks over the last century is considerably higher than Treasury bonds, housing, and all commodities, such as oil and gold.

Though Wall Street offers countless ways to grow your wealth, few have arguably been more successful over the long run than buying and holding high-quality dividend stocks.

Image source: Getty Images.

Just how good have dividend stocks been over the long run? According to "The Power of Dividends: Past, Present, and Future," which is a report released last year and updated recently by the investment advisors at Hartford Funds, the average annual return for dividend payers over the last half-century (1973-2023) is 9.17%. By comparison, companies that didn't pay a dividend have averaged a more modest annualized return of 4.27% over 50 years.

Moreover, dividend stocks more than doubled up the annual average return of non-payers with less volatility. Whereas the non-payers were 18% more volatile the benchmark S&P 500, dividend stocks were, on average, 6% less volatile than the broad-based index. Companies that regularly share a percentage of their earnings with investors tend to be profitable, time-tested, and are often capable of providing transparent growth guidance.

One index that's absolutely packed with profitable, time-tested, dividend-paying businesses is the ageless Dow Jones Industrial Average (DJINDICES: ^DJI). Since its introduction in late May 1896, the Dow Jones has evolved from a 12-stock index that prominently housed industrial stocks to one that's now home to 30 multinational companies from an assortment of sectors and industries.

Among the Dow's 30 components are two high-yield dividend stocks -- "high-yield" in the sense that their yields are between 2 and 3.9 times higher than the current yield of the S&P 500 (1.36%) -- which are begging to be bought right now!

Time to pounce: Chevron (4.18% yield)

The first high-yield Dow stock that income-seeking investors can confidently pounce on right now is global energy juggernaut Chevron (NYSE: CVX). Chevron's nearly 4.2% yield makes it one of the highest-yielding stocks in the Dow.

Chevron has increased its base annual payout for 37 consecutive years. CVX Normal Dividends Paid (Quarterly) data by YCharts.

All stocks come with potential risk. For Chevron, the prevailing concern for existing and prospective investors is the likelihood of a recession taking shape. Commodities like oil and natural gas often ebb-and-flow with the pace of economic growth. But with select predictive indicators pointing to trouble, such as the first notable decline in M2 money supply since the Great Depression, there's the risk that energy commodity spot prices could decline.

On the other hand, economic growth cycles aren't linear. Whereas most recessions resolve in less than a year, periods of economic expansion in the U.S. typically stick around for many years. This tends to have a positive impact on the spot price of energy commodities.

Furthermore, Chevron is benefiting from macro trends specific to the oil and gas industry. During the COVID-19 pandemic, unprecedented demand uncertainty caused global energy majors, including Chevron, to drastically slash their capital expenditures (capex). Even with capex returning to normal levels, three years of underinvestment has led to tight oil supply. There's no quick fix to this supply constraint, which is providing a nice boost to the spot price of crude oil.

It's worth pointing out that Chevron is in the (lengthy) process of acquiring Hess in an all-share deal initially valued at $53 billion. Assuming the deal gets the green light from regulators, Hess will add 465,000 net acres of oil-rich land in the Bakken Shale to Chevron's already extensive assets, as well as increase its presence in Guyana. If the spot price of crude remains elevated, it makes these assets Chevron is acquiring even more valuable.

Another reason Chevron is a smart energy stock to own is its integrated operating structure. In addition to its moneymaking drilling segment, Chevron operates transmission pipelines, chemical plants, and refineries. These are segments that generate predictable operating cash flow and can help hedge against downside in the spot price of oil. This cash-flow transparency is what's helped Chevron increase its base annual payout for 37 consecutive years.

Chevron's management team deserves credit for the company's long-term success, as well. It has one of the most-flexible balance sheets among global energy majors (i.e., one that isn't weighed down by excessive debt), and its board approved a whopping $75 billion share repurchase program last year.

The final puzzle piece is Chevron's valuation. A forward price-to-earnings (P/E) ratio of 11 represents a 23% discount to its average forward-year earnings multiple over the last five years.

Image source: Getty Images.

Time to pounce: Johnson & Johnson (3.37% yield)

The second high-yielding Dow Jones Industrial Average stock that's begging to be pounced on by opportunistic long-term investors is none other than healthcare conglomerate Johnson & Johnson (NYSE: JNJ). "J&J," as the company is more-commonly known, has a yield that's about 2.5 times greater than the S&P 500. Further, the company has increased its payout for 62 consecutive years.

The reason J&J has greatly underperformed in the current bull market can be largely traced to litigation uncertainty. It's facing in the neighborhood of 100,000 lawsuits that allege its now-discontinued talcum-based baby powder causes cancer. Johnson & Johnson has attempted to settle this litigation on two occasions, but had both of its attempts tossed in court. Wall Street simply isn't a fan of legal gray clouds.

However, the good news is that J&J is one of only two publicly traded companies that bears Standard & Poor's (S&P) highest credit rating (AAA). This rating implies that S&P has the utmost confidence that Johnson & Johnson will be able to service its outstanding debts and pay whatever settlement is needed to put this matter to rest. J&J's cash-rich balance sheet, and its more than $23 billion in operating cash flow generated from operations over the trailing-12-month period, give it plenty of financial flexibility.

The predictability of the healthcare sector is what makes Johnson & Johnson's cash flow so predictable. This is to say that people don't get the luxury of deciding when they become ill or what ailment(s) they develop. Regardless of what's happening with the U.S. or global economy, people will always need prescription medicines and medical devices. Prior to the COVID-19 pandemic, J&J had grown its adjusted operating earnings for 35 consecutive years.

J&J's not-so-secret sauce has been its decisive shift toward pharmaceuticals. Even though novel drugs have finite periods of sales exclusivity, they generate superior margins and provide plenty of pricing power. Johnson & Johnson has been more-than-willing to support its pharmaceutical operations with ample capital for research and collaborations.

This is a good time to mention that J&J is also one of the world's leading medical-device companies. While medical devices are considered somewhat of a commoditized industry, medical technology companies like J&J are well-positioned to benefit from an aging global population. This segment serves as another hedge against the loss of exclusivity for its novel therapies.

Perhaps the most-overlooked positive for Johnson & Johnson is its management team. It's had just 10 CEOs since being founded in 1886. The value of consistency in key leadership positions cannot be overstated. Minimal change at the top leads to predictable growth trends and initiatives that are seen through from start to finish.

Lastly, Johnson & Johnson wouldn't be a screaming buy if it didn't have an exceptionally cheap valuation. Shares can be scooped up right now for 13.5 times forward-year earnings. This marks a decade-low and is a 16% discount to its average forward earnings multiple over the last five years.Should you invest $1,000 in Chevron right now?

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*Stock Advisor returns as of June 10, 2024Sean Williams has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chevron. The Motley Fool recommends Johnson & Johnson. The Motley Fool has a disclosure policy.

CVX, ^DJI, JNJ, bb24631d-aedd-439c-b896-aa4557fe58c3, investing