Should You Buy the 3 Highest-Paying Dividend Stocks in the Dow Jones? (One Recently Yielded 6%.)

It’s smart to be a dividend investor because dividends are terrific contributors to not only the portfolios of retirees but also those of younger folks. After all, that fairly regular and dependable income can also be used to buy more shares of stock.

It’s important, though, not to just seek the highest dividends you can find. So, don’t just snap up shares of the highest-paying dividend stocks in the Dow Jones Industrial Average (The Dow).

Dividend basics

First, let’s review some dividend basics. To compare apples to apples, we typically assess a stock’s dividend yield, which is its annual dividend amount divided by its current stock price. So, if Scruffy’s Chicken Shack (ticker: BUKBUK) pays $1 per quarter and is trading at $80 per share, the dividend yield is $4 divided by $80, which is 0.05, or 5%.

It’s important that the dividend yield can be expressed as a fraction, with the dividend on top and the share price below. That shows that when the share price shrinks, the yield’s value goes up and vice versa. For example, if Scruffy’s stock falls and is trading at $60, divide $4 by $60, and you’ll get 0.067, or 6.7%. The stock is down, but the yield — the percentage of the stock price that you’ll receive annually in the form of a dividend — goes up.

That’s why we need to tread cautiously when we’re dividend-stock hunting and encounter outsize yields.

Should you buy the highest-yielding stocks in the Dow?

Back to our original question. The answer is…it depends. Do take an extra-long look at any such stocks to make sure the yields are not high due to serious challenges the companies are facing. Here are the three Dow components with the highest recent dividend yields.

1. Verizon Communications: recent dividend yield of 6.01%

Verizon Communications (VZ +3.18%) is a stock I would be willing to buy at recent prices — and actually own. It has the most customers among its peers and has recently been gaining more at its rivals’ expense. It’s not likely to grow briskly, but it’s a solid blue chip stock with a hefty dividend yield.

2. Chevron: recent dividend yield of 3.97%

Chevron (CVX +1.94%) is another stock that doesn’t seem alarming, despite its above-average yield. It’s a well-regarded, vertically integrated energy company with nearly 40 years of annual dividend increases and a healthy balance sheet. Buying stock in Chevron doesn’t seem very risky to me.

3. UnitedHealth Group: recent dividend yield of 3.44%

UnitedHealth Group (UNH +2.03%) is a more complicated proposition. It’s at risk of having its profitability challenged by regulators, and it recently underperformed revenue expectations. The stock is down nearly 50% over the past year, so be wary if you’re considering investing in this stock.

So, take a closer look at any of these companies that intrigue you. Know, too, that there are also some great dividend-focused ETFs out there.