To produce around $325 in passive income by 2025, one simply needs to invest $3,500 in each of these three dividend-paying Dow stocks.
To produce around $325 in passive income by 2025, one simply needs to invest $3,500 in each of these three dividend-paying Dow stocks.
As 2024 draws to a close, it's likely that the Dow Jones Industrial Average will trail behind both the S&P 500 and the Nasdaq Composite in terms of performance for the year. Over the past five years, the Dow has delivered a respectable 68.2% total return, but this figure pales in comparison to the S&P 500's 102.8% or the Nasdaq's impressive 132.7% during the same period.
Nevertheless, Dow stocks can be an enticing option for investors searching for high-quality, blue chip companies that pay dividends. Many Dow stocks maintain dominant positions in their respective industries and have a proven history of increasing earnings. These companies hold more value based on their current accomplishments rather than their future potential, making them less vulnerable to volatility when investors become less eager to pay premiums for growth stocks.
Investors looking for passive income from Dow stocks might find interest in dividend stocks such as McDonald's (-0.40%), The Home Depot (-0.58%), and Chevron (0.01%). Investing $3,500 in each of these Dow stocks can potentially generate around $325 in passive income in 2025, with the likelihood of even more dividend income in the future, if all three companies continue to boost their payouts annually.
McDonald's could leverage its reward system for new growth
McDonald's possesses a distinct business structure, owning only about 5% of its stores and franchising the remaining 95%. McDonald's collects royalties and rent from its franchisees in exchange for participation in the global brand. The more franchisees that join the system, the faster McDonald's can expand globally.
Recently, McDonald's has experienced fluctuating sales. The company reported flat systemwide sales in the latest quarter, a mere 2% increase in consolidated revenue on a constant currency basis, and a 1% decrease in diluted earnings per share. Systemwide sales refer to sales from all restaurants, providing a clear picture of how its over 40,000 locations are performing. McDonald's corporate does not account for systemwide sales; it instead registers revenue from its owned and operated stores and franchise fees.
McDonald's attempted to tackle inflationary pressures by implementing price increases, which met with resistance from customers in recent quarters. The company also faced an E. coli outbreak in October, causing a drop in sales. The fallout from the outbreak will be reflected in McDonald's upcoming quarterly results.
However, despite these challenges, McDonald's remains an appealing investment prospect for patient investors. The company has raised its dividend for 48 consecutive years, offering a yield of 2.4%. The price-to-earnings (P/E) ratio is 25.8, which is slightly lower than its five-year median P/E of 26.5, suggesting that McDonald's is a reasonable value.
McDonald's growth has been relatively slow in recent years, but there are promising signs that its loyalty program is gaining traction. McDonald's is expanding its loyal customer base through mobile ordering and pickup and a sophisticated rewards program. The app defaults to the nearest store when location services are enabled, making it simple for customers to order on the go.
Given the rapid expansion of the loyalty program in recent years, McDonald's is projecting 250 million active users by the end of 2027. Loyalty customers tend to visit McDonald's more frequently and order more per visit, allowing the company to boost customer engagement without relying solely on price increases.
All in all, McDonald's emerges as a strong dividend stock to consider investing in for 2025.
Home Depot will recover from its recent slump
Like McDonald's, Home Depot has experienced a slowdown. Home Depot's performance is dependent on a high volume of home sales and home improvement project spending. Higher interest rates have led to increased borrowing costs, which resulted in higher mortgage interest rates and a reduced volume of home sales.
As shown in the graph, Home Depot's earnings have been on a steady upward trend for most of the past 15 years, but there has been a noticeable dip in earnings over the past two years. Some of this downturn is attributable to external factors, such as the impact of the surge in purchases and low interest rates during the height of the pandemic, which accelerated Home Depot's sales, and subsequently contributed to a slower recovery in 2023 and 2024.
2025 could mark a turnaround for Home Depot, but do not expect a substantial rebound in the company's performance immediately. The Federal Reserve may slow the pace of rate cuts, which could affect the housing market for an extended period. This could lead to a decline in consumer spending for an extended period.
Regardless of the uncertainties ahead, Home Depot is a robust business offering an attractive dividend at a reasonable price. Home Depot's P/E ratio is 26.8, and it has boosted its dividend by around five-fold over the past decade as the business has experienced rapid growth. With a yield of 2.3% and a strong track record of beating market returns, Home Depot is a well-balanced Dow blue chip dividend stock worth buying now.
Chevron can maintain its dividend, even with lower oil prices
Even with a minor increase in the S&P 500 over the past month, Chevron and the broader energy sector have plummeted by more than 11%. West Texas Intermediate crude oil prices, the U.S. benchmark, have dipped to their lowest levels in over a year. The likelihood of the Federal Reserve maintaining interest rates at higher levels for an extended period could curb economic growth, thereby impacting oil and gas demand.
Despite the obstacles, Chevron is an appealing dividend share to invest in at the moment. Chevron offers a significant yield of 4.6% and has increased its dividends for 37 consecutive years.
Notably, Chevron possesses the flexibility to cover its dividend and investment expenditures, even if oil prices decrease. The company has managed to decrease its production costs thanks to technological advancements and investments in high-profit areas, such as the Permian Basin.
One source of uncertainty is Chevron's agreement with Hess. On October 23, 2023, Chevron announced a deal to acquire Hess in a stock-only deal worth $53 billion. However, this deal has been postponed due to disputes over contractual terms with ExxonMobil and regulatory pressures. On September 30, the Federal Trade Commission concluded its antitrust investigation of the deal, allowing Chevron to proceed, provided Hess CEO John Hess would not join Chevron's board.
If the Hess deal materializes, it should enhance Chevron's free cash flow and broaden its asset portfolio, offering it crucial access to low-cost offshore reserves in Guyana. However, some exploration and production companies are currently at 52-week lows, suggesting that Chevron might have missed out on a better acquisition price if it had waited.
Nevertheless, the deal seems like a viable long-term choice for Chevron. With a strong financial foundation and an extremely low valuation, Chevron emerges as a promising high-yield dividend stock to purchase immediately.
Despite the challenges faced by some blue chip companies, investing in dividend stocks like McDonald's, The Home Depot, and Chevron can still provide passive income. For instance, investing $3,500 in each of these Dow stocks could potentially generate $325 in passive income in 2025 for McDonald's, or $199 for The Home Depot, and $1,813 for Chevron if their dividend payouts continue to increase annually. In the case of Chevron, its high dividend yield and consistent payouts make it an attractive option, even if oil prices decrease.