Becoming a dividend investor is a smart move because dividends make a huge contribution not only to the portfolios of retirees, but also to the portfolios of young people. After all, fairly regular and reliable income can also be used to buy more shares.
But it’s important not to just go for the highest dividend you can find. So don’t just snap up the stocks with the highest dividend yields in the Dow Jones Industrial Average (The Dow).
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First, let’s review some dividend basics. To compare apples to apples, we typically evaluate a stock’s dividend yield, which is the annual dividend amount divided by the current share price. So if Dirty chicken shed (ticker: BUKBUK) pays $1 per quarter, trades at $80 per share, and has a dividend yield of $4 divided by $80, or 0.05, or 5%.
Importantly, dividend yield can be expressed as a fraction, with the dividend on top and the share price on the bottom. This suggests that when stock prices fall, the value of the yield rises, and vice versa. For example, if Scruffy’s stock fell and was trading at $60, divide $4 by $60 and you would get 0.067, or 6.7%. Stocks go down, but the yield—the percentage of a stock’s price you receive in the form of dividends each year—goes up.
That’s why we need to proceed with caution when we look for dividend stocks and encounter yields that are too high.
Back to our original question. The answer is…it depends. Please take an extra long-term look at any such stock to make sure the yield isn’t high due to the serious challenges facing the company. Here are three Dow stocks with the highest recent dividend yields.
Verizon Communications (NYSE: VZ) A stock that I would buy at the most recent price and actually own. It has the most customers among its peers and has recently gained more customers at the expense of competitors. It’s not likely to grow quickly, but it’s a solid blue chip stock with a high dividend yield.
Chevron (NYSE: CVX) Another stock that doesn’t seem worrisome despite its above-average yields. It’s a well-respected, vertically integrated energy company with nearly 40 years of annual dividend increases and a healthy balance sheet. To me, buying Chevron stock doesn’t seem very risky.
