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Five best Dow stocks with big dividends Add to ...

The trend is clear: Benchmark indices have barely made money for investors this year. Until the economy shows sustained vibrancy in consumer spending, manufacturing and housing, equities will struggle.

Another headwind is the conclusion, this month, of QE2, the Federal Reserve's second stage of stimulating markets with Treasury bond purchases. Because of the backlash against quantitative easing part deux - it's been expensive and, arguably, created bubbles in commodities and other assets - a third round is politically unfeasible for the Fed.

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But, the Fed chairman has noted that "further easing is warranted." Many expect a verbal tweak to his "extended period" language for low interest rates. With many forecasting a delay in hikes until 2013, yield investments, including dividend stocks, are attractive.

The following five Dow dividend stocks aren't necessarily the highest-yielding, but they have improved their businesses and boosted distributions over the past five years. Income-seeking investors should investigate these stocks as quarterly dividends will produce positive returns in a middling market. After all, the Dow Jones industrial average of the biggest 30 U.S. companies and the broader S&P 500 index are little changed this year.

Below is a closer look at the stocks.

5. Chevron is the world's second-largest energy company, trailing rival Dow component Exxon Mobil . Chevron's first-quarter net income and earnings per share gained 36 per cent. Sales grew by 26 per cent. While elevated crude oil prices are popularizing energy investments, Chevron's bulk, well-managed balance sheet and steady dividend growth make it a still-ideal play. It yields a solid 3.1 per cent and has grown the dividend 7.2 per cent and 9.5 per cent, annualized, over a three- and five-year span, respectively. Elevated energy prices may prove a lasting impediment to growth, so investors should position themselves to profit from the trend.

4. Intel has fallen 6.6 per cent in the past month as the stock market corrected, even though the company has delivered outstanding results in the past 12 months. Intel's adjusted first-quarter net income increased 29 per cent and earnings per share expanded 30 per cent. Sales rose 25 per cent. Intel's 75 per cent gross margin and 35 per cent operating margin rank atop the semiconductor industry. The stock offers a 3.8 per cent dividend yield, among the highest in the tech sector. And, the distribution has grown 11 per cent and 13 per cent, annualized, over a three- and five-year span, respectively. The stock trades at a forward earnings multiple of 9.1 and a cash flow multiple of 7.2, sizable peer discounts.

3. Kraft is a global food products company, selling snacks, candy and quick meals. Its stock has been a solid performer amid the recent correction, declining 1.8 per cent in four weeks, less than the 3.8 per cent drop of the S&P 500. Kraft's adjusted first-quarter earnings advanced 6.1 per cent to 47 cents, beating consensus by 11 per cent. More importantly, its operating margin declined just marginally to 13 per cent, a signal that price increases are feasible for Kraft, whose input costs have risen in recent months. Kraft's stock yields 3.4 per cent, with a safe payout ratio of 67 per cent. The dividend has grown 3.1 per cent and 5.3 per cent, annualized, over a three- and five-year span, respectively. The stock is up 8.7 per cent in 2011.

2. JPMorgan is a diversified financial-services company, with retail-, commercial- and investment-banking operations. JPMorgan was the highest-rated Dow stock, based on analysts' aggregate ratings, at the beginning of 2011, yet, it has declined 1.3 per cent this year as mortgage woes and threats of Basel III charges hurt sentiment. The bank delivered first-quarter net income of $5.6-billion, a 67 per cent increase from a year earlier. But, sales dropped 6.6 per cent. JPMorgan received permission to quintuple its dividend to 25 cents. The global bank's stock now yields a solid 2.4 per cent. Financials have been poor performers as of late, but at 7.3-times forward earnings, JPMorgan is cheaper than its peers.

1. Caterpillar makes construction and mining equipment. It has sizable exposure to infrastructure spending in emerging markets. Cat was the best-performing Dow stock of 2010, but it has dropped 16 per cent from its 2011 high. The company's revenue grew 57 per cent last quarter and 51 per cent over a trailing 12-month basis as net income roughly tripled. Caterpillar yields a healthy 1.9 per cent. Its dividend has grown 6.9 per cent and 12 per cent, annualized, over a three- and five-year span, respectively. Despite outstanding performance, Caterpillar is reasonably priced, selling for a forward earnings multiple of 11, a 28 per cent peer discount.

 

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