Should You Buy the 3 Highest-Paying Dividend Stocks in the Dow Jones?

Key Points

• The "Dogs of the Dow" can uncover steady, high-yield stalwarts, not just temporarily cheap names.

• Verizon and Chevron face more long-term issues than sudden system shocks.

• Merck's high yield looks like a classic Dogs idea.

• 10 stocks we like better than Merck ›

"Dogs of the Dow" is a classic investment strategy. The idea is to find top-tier companies whose stocks are trading at unusually low prices, presumably for temporary reasons.

Low stock prices have the opposite effect on dividend yields, especially among stocks with long operating histories and rich cash flows. So, the quick and easy way to find these proven winners under price-slashing pressure is to start with the 30 Dow Jones Industrial Average (DJINDICES: ^DJI) components and sort them by their dividend yield. Buying the top results sets your portfolio up to benefit as the struggling giants get back on their feet.

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Now, the Dogs of the Dow model isn't perfect. Besides short-lived discounts on top stocks, it also finds some slow-moving cash machines whose dividend yields simply stay generous for years. In fact, that's how I would classify all three of the Dow's top dividend yields today.

1. Verizon: 6.2% dividend yield

Generous dividends are not unusual in the telecommunications industry. Verizon Communications (NYSE: VZ) is a shining example, with an average yield of 5.2% over the last decade. To put this lofty payout in perspective, the average Dow yield was 1.5% over the same period.

But the current 6.2% yield is even greater. As of Sept. 1, Verizon's stock has lagged behind the broader stock market in the last five years, posting a negative return of 25.4% over that period. With Verizon's dividends reinvested in my shares of the stock, you'd have a total return of 0.1% instead.

Verizon is still the king of the wireless hill, with 146.1 million retail connections (combining prepaid and contract-bound smartphones, tablets, and Internet of Things devices into a single metric). Runner-up T-Mobile US (NASDAQ: TMUS) sports 132.8 million total customers and AT&T (NYSE: T) pulls into third place, with 118.2 million total mobility subscribers.

Image source: Getty Images.

T-Mobile keeps stealing customers from its older and larger mega-rivals. T-Mobile's subscriber count rose 5.5% year over year, well ahead of 2.3% for AT&T and 1.2% in Verizon's reports.

So Verizon's stock has been lagging for good reason. Subscriber growth is a crucial element of this industry's financial results, and Verizon isn't keeping up with the Joneses.

That said, Verizon is an efficient cash machine with a shareholder-friendly dividend policy. You could adopt the Dogs of the Dow philosophy and buy Verizon stock, hoping for a turnaround with greater growth someday. Or, you could simply accept Verizon's modest growth and negative stock returns in exchange for a top-notch dividend yield. Income investors love Verizon's reliable dividend checks.

2. Chevron: 4.3% dividend yield

Energy stocks also tend to pay above-average dividends. Chevron (NYSE: CVX) has averaged a 4.2% yield over the last 10 years, and its yield sits exactly on this long-term average level today.

The giant oil and gas producer expects fossil fuels to stay in the "mix" of energy sources in the long run, as the global energy demand keeps increasing. Planning ahead for a more eco-friendly future, Chevron is developing renewable alternatives like biodiesel, hydrogen fuel cells, and recycled oil.

So Chevron is doing what it can to stay relevant in a rapidly changing energy market. The results are a mixed bag so far, with lower revenues and free cash flows since the inflation panic of 2022.

I appreciate Chevron's research efforts, but the company still looks strikes me as an obsolete business in the long run. Verizon will pretty much always have plenty of wireless customers to fight for, while Chevron's core business is fading out.

Granted, Chevron will stay firmly profitable for years to come, and maybe even decades. And who knows -- maybe the company comes up with the perfect fuel cell or biodiesel technology eventually. Still, I'd much rather park my cash in Verizon's higher-yielding dividend garage in the long run.

3. Merck: 3.7% dividend yield

Rounding out the Dow's top three dividend yields today is pharmaceutical developer Merck (NYSE: MRK). This is the closest thing to a classic Dogs of the Dow investment at the moment, as Merck's stock price took a 29% cut over the last year.

Merck's best-selling cancer treatment Keytruda has been around since 2008, and its key patents start to expire in 2028. Facing a revenue-crushing inrush of biosimilars, Merck is reformulating Keytruda with less-invasive injection options. Falling off the patent cliff will undoubtedly lower Keytruda's financial contributions, even if Merck's subcutaneous injections are more convenient.

Remember, patient preferences never tell the whole story. For example, my insurance company was quick to embrace generic options when Teva Pharmaceutical Industries (NYSE: TEVA) lost its patent protection for my multiple sclerosis treatment, Copaxone. Teva's freshly patented reformulation with fewer injections per week didn't really matter -- shifting insurance coverage sent me to the generic version by Viatris (NASDAQ: VTRS) right away.

I don't know if the same scenario will play out around the Keytruda patent expiration, but I've seen the pharma industry's patent drama in action. Merck faces significant financial issues here.

Then again, the Keytruda expiration isn't Merck's first rodeo, and the company always has a plethora of potential blockbusters under development. All things considered, Merck's stock could be a solid Dogs of the Dow investment in September.

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Anders Bylund has positions in T-Mobile US. The Motley Fool has positions in and recommends Chevron and Merck. The Motley Fool recommends T-Mobile US and Verizon Communications. The Motley Fool has a disclosure policy.