For investors looking to build an income-generating portfolio, the Dow Jones Industrial Average — America’s oldest stock index — is a great place to go hunting for dividend stocks. Dividend stocks are companies that share some of their profit with shareholders in the form of periodic cash payments. 

And while being a dividend payer isn’t a requirement for admission to the index, a long history of increasing dividend payments to shareholders signals strength and maturity, things the Dow’s selection committee looks for when selecting stocks. 

The Dow’s components are selected by a five-person group known as the Averages Committee, which includes three representatives from S&P Dow Jones Indices and two representatives from the Wall Street Journal, a paper founded by Charles Dow, who created the index back in 1896. When adding stock to the Dow to replace companies that have been dropped, the Averages Committee considers each company’s “reputation, its history of sustained growth, its interest to investors, and its sector representation of the broader market,” according to S&P Global. Essentially, the DJIA comprises successful blue-chip companies that represent the best of their industry or sector — many of which happen to be great dividend payers. 

And while there are plenty of stocks that aren’t in the DJIA that may have higher dividend yields, choosing dividend stocks from the Dow can be a safer bet, as these companies are usually older, stronger, and less likely to lose significant value when held for the long term. Add in quarterly cash payments to you, and you’ve got the beginnings of a solid, sector-diversified, income-generating portfolio. 

So, which Dow stocks have the highest dividend yields? And, perhaps just as important, which have the highest dividend payout ratios, and which have increased their dividend payouts the most over the last decade, indicating a tendency to increase dividends over time? 

Before we dive into details, let’s define some terms: 

Dividend yield vs. dividend payout ratio explained 

A stock’s dividend yield is calculated by dividing a company’s annual dividend payout per share by the company’s share price. In other words, dividend yield is how much free cash you get out of owning one share of a company’s stock per year. 

Dividend yield = dividends paid per share / share price

A stock’s dividend payout ratio, on the other hand, is calculated by dividing a company’s dividends paid per share by its earnings per share. In other words, it expresses the percentage of a company’s profit that it shares with stockholders as dividends each year. 

Dividend payout ratio = dividends paid per share / earnings per share

The Dow 30 stocks & their dividend data

Below, you can see the current (as of this article’s last update) dividend yields and payouts of each Dow stock, along with the average annual dividend payout growth over the last 10 years. 

Source: GuruFocus

What dividend investors need to consider before buying a stock

When it comes to evaluating companies for their dividends, there are several important factors to consider. First, past performance is never a guarantee of future results. Any company can stop paying dividends at any time. That being said, they usually try to avoid this, as it signals to investors that they don’t have enough cash on hand. 

A long history of growing dividend payments, however, usually signals that a company will do what it can to keep paying its shareholders in the future.

Another thing to look out for is an overly high dividend payout ratio. Companies need money on hand to invest in their operations and explore growth prospects. The closer a stock’s dividend payout ratio is to 100%, the less cash it is keeping on-hand to maintain the health of the company, which could signal future instability. 

The higher a company’s dividend yield, the more free money you get per year for each dollar you invest. Too high a yield, though, could signal that a company’s share price has declined, which could also signal weakness.

The ideal dividend stock for long-term investment, therefore, should have a healthy dividend yield, a relatively high (but not too high) dividend payout ratio, and a solid history of increasing dividends paid per share over time. 

So, which of the Dow’s 30 stocks best meet these criteria? 

Which Dow stocks should dividend investors consider adding to their portfolios? 

Looking at the list above, Boeing and Amazon don’t currently pay dividends, so they’re out. Salesforce only started paying dividends recently, and 3M’s dividend payouts have fallen on average over the past decades.The following Dow stocks, though — in no particular order — seem to have a healthy record of dividend growth, sustainable payout ratios, and decent yields, meaning their stocks are relatively affordable for the dividends they provide: 

• Coca-Cola
• Home Depot
• Amgen
• United Health Group
• IBM
• McDonalds
• Merck 
• Johnson & Johnson
• Honeywell International
• Proctor & Gamble 
• Cisco Systems
• Goldman Sachs
• Travelers Companies