3 Dow Stocks to Buy for Income

So far, 2022 has not been a good one for many stocks. The growth, technology and consumer discretionary categories did well during the pandemic. However, inflation, rising interest rates, and a return to normal caused investors to become more risk-averse. As a result, the major indices are either in correction or bear market territory.

However, one group of stocks has performed well as a group. The 2022 Dogs of the Dow are up 1.1% year-to-date, far better than the S&P 500 or Nasdaq. However, several of them still have high dividend yields and are at desirable levels for investors seeking income to live off dividends.

Below, we discuss three Dow stocks for income.

Dow Stocks for Income: Dow (DOW)

Dow Inc. (NYSE:DOW) traces its history to more than 125 years ago. The company has grown into one of the largest global chemical companies through acquisitions and reorganization. The company acquired Union Carbide in 2001 and Rohm & Hass in 2008.

Next, in 2015, Dow merged with DuPont forming DowDuPont, followed by the acquisition of the remaining interest in DowCorning. In 2019, the company de-merged, forming Corteva, Dow, and DuPont du Nemours.

Today, Dow is a maker of commodity chemicals with three operating segments: packaging and specialty plastics, industrial intermediates and infrastructure, plus performance materials and coatings.

The company generated $58,350 million of revenue in the last 12 months, with gross margins in the high teens. Demand collapsed during 2020, but the rapid recovery in 2021 gave Dow pricing power and led to solid revenue growth. Although the company grows organically as a commodity chemical producer, it is sensitive to the economic cycle. Additionally, high oil and other input prices affect margins and thus profitability.

The current Dow only has a short operating history. The dividend increased once since the de-merger but has remained constant since 2020. But the company is the highest yielding Dog of the Dow with a dividend yield of approximately 5.4%, three times the average for the S&P 500. In addition, the dividend is safe with a conservative payout ratio of about 28%.

Dow’s stock price declined since the fear of recession increased, and commodity chemical demand may decrease. The stock has fallen ~23% in the past month, pushing the forward price-to-earnings ratio (P/E ratio) to about 6.6x. Investors are getting a high-yield stock at a relatively low valuation.

Verizon Communications (VZ)

Next on our list of Dow stocks to buy for income, Verizon (NYSE:VZ) is one of the successor companies of the original AT&T breakup. The company started as Bell Atlantic, but after the merger with GTE, it changed its name to Verizon. Today, the telecommunications giant is one of three market leaders in wireless in the U.S.

Verizon’s business is vast with about 115 million retail wireless connections, of which ~91.4 million are postpaid, and the remainder are prepaid. Verizon’s scale makes it an oligopoly with AT&T (NYSE:T) and T-Mobile (NASDAQ:TMUS), which combined have 90%+ of the prepaid market. In addition, it has 7 million broadband connections, including ~6.6 million FiOS connections. The company has exited the fixed wireline market except in the Northeast.

Verizon earned $134,300 million in the last 12 months, of which about 75% to 80% is from the wireless business. Much of the company’s revenue is recurring and arguably inflation and recession-resistant. Consumers and businesses are less likely to give up cell phone service, which is a necessity.

Although Verizon has a stable revenue stream, it does not see much organic growth. Revenue growth averages about 1% to 2% annually. In addition, a significant acquisition or merger is unlikely based on the risk of reduced competition. However, Verizon has grown through bolt-on acquisitions like Tracfone and XO Communications.

The main argument for owning Verizon is the 5%+ dividend yield combined with consistent dividend growth and solid dividend safety. Verizon is a Dividend Contender with 18 consecutive years of increases. The dividend growth rate is remarkably steady at about 2% annually. In addition, the relatively low payout ratio of ~47% means the yield is safe.

The stock price is down only about 2.8% year to date and down 9.3% in the trailing 1-year. Furthermore, the valuation is only about 9.5X, below the 5-year and 10-year range. As a result, investors are getting an undervalued blue-chip Dow Jones stock yielding more than 5%.

Dow Stocks for Income: IBM (IBM)

The final entry for today’s Dow stocks for income, IBM (NYSE:IBM) is one of the largest global IT services companies. It has recently gone through significant changes by acquiring Red Hat and divesting its managed infrastructure services business. Today, IBM focuses on hybrid cloud, software, consulting, and mainframes. The company is the leader in mainframes with 90%+ market share.

Total revenue was $57,637 million in the last 12 months after accounting for the divesture of Kyndryl. Revenue is divided approximately into software (~42%), consulting (~29%), infrastructure (~26%), with the rest from financing and other.

The company grows organically by selling more services and software to its large customer base. Additionally, IBM is conducting many tuck-in acquisitions for AI, security, cloud and consulting, adding revenue and talent. Some recent additions include Rego Consulting, 7Summits, Bluetab, BoxBoat, Waeg, Turbonomic, SXiQ, and Envizi.

IBM is not the first company that comes to mind as an income or dividend growth stock. However, the dividend yield is ~4.6%, and the company is now a Dividend Aristocrat with 27 years of increases. The payout ratio had risen but is now a more acceptable 68%. However, dividend growth has slowed to less than 1% annually as IBM focuses on deleveraging and growth.

Despite the bear market, IBM’s stock price is up about 5% for the year and 2.9% in the past year. Moreover, the valuation has ticked up to about 14.6x at the higher end of the 5-year range, but IBM is not overvalued.

On the date of publication, Prakash Kolli held a long position in IBM. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines. The author is not a licensed or registered investment adviser or broker/dealer. He is not providing you with individual investment advice. Please consult with a licensed investment professional before you invest your money.