With 2024 nearly over, the Dow Jones Industrial Average will almost certainly underperform the S&P 500 and the Nasdaq Composite for the year. Over the last five years, the Dow has produced a respectable 68.2% total return, but that’s quite a bit lower than the S&P 500’s 102.8% or the Nasdaq’s 132.7% total return during that period.
Still, Dow stocks can be solid buys for folks looking for quality, blue chip companies that pay dividends. Many Dow stocks are industry leaders and have proven track records for growing earnings. Because these companies are more valued for what they are today rather than for what they could become in the future, they can be less volatile when investors are less willing to pay up for growth stocks.
Folks looking to generate passive income from Dow stocks may want to take a closer look at dividend stocks McDonald’s (MCD -0.40%), The Home Depot (HD -0.58%), and Chevron (CVX 0.01%). Investing $3,500 into each Dow stock should help generate just over $325 in passive income in 2025 — and likely even more dividend income in the future — if all three companies continue to raise their payouts every year. Here’s why all three companies are balanced buys now.
Image source: Getty Images.
The McDonald’s rewards program can help the company kick into a new growth gear
McDonald’s has a unique business model where it owns and operates around just 5% of its stores and franchises the rest. McDonald’s collects royalties and rent from its franchisees, and in turn, they get to participate in a global brand. The more franchises that buy into the system, the faster McDonald’s can expand globally.
But McDonald’s has been in a bit of a sales funk lately. The company reported flat systemwide sales in the recent quarter, just a 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, which provides a good reading on how the company’s over 40,000 locations are performing. McDonald’s corporate doesn’t collect systemwide sales, but instead books revenue from its owned and operated stores and franchise fees.
McDonald’s responded to inflationary pressures with price increases, which received customer pushback in recent quarters. It also faced an E. coli outbreak in October, which damaged sales. The outbreak’s effect will be reflected in McDonald’s upcoming quarterly results.
Despite the challenges, McDonald’s remains a compelling investment opportunity for patient investors. The company has raised its dividend for 48 consecutive years and yields 2.4%. The price-to-earnings (P/E) ratio is at 25.8 — slightly below the five-year median P/E of 26.5 — indicating that McDonald’s is a decent value.
McDonald’s growth has been fairly lackluster in recent years, but there are encouraging signs that its loyalty program is gaining momentum. McDonald’s is growing its loyal customer base through mobile ordering and pickup and a sophisticated rewards program. When location services are turned on, the app automatically defaults to the closest store, making it easy to order on the go.
Given the massive growth in the loyalty program in recent years, McDonald’s is guiding for 250 million active users by the end of 2027. Loyalty customers tend to visit McDonald’s more frequently and order more per visit. Growing the loyalty program allows McDonald’s to boost engagement without relying so much on price increases.
Add it all up, and McDonald’s stands out as a solid dividend stock to buy in 2025.
Home Depot will recover from its recent slowdown
Like McDonald’s, Home Depot has been in a slowdown. Home Depot benefits when there is a high volume of home sales, and when folks spend money on home improvement projects. Higher interest rates have inflated borrowing costs, which has led to higher mortgage interest rates and a lower volume of home sales.
U.S. Existing Home Sales data by YCharts. EPS = earnings per share.
As you can see in the chart, Home Depot’s earnings have been going practically straight up for most of the last 15 years, but they’ve taken a noticeable dip over the last couple of years. Part of the dip is from the macro factors discussed. A surge in purchases and low interest rates during the pandemic’s height pulled forward sales at Home Depot — amplifying the slowdown in 2023 and 2024.
2025 could mark a turning point for the company, but don’t expect a massive rebound in Home Depot’s performance right away. The Federal Reserve may slow the pace of rate cuts, which could pressure the housing market for longer. Higher interest rates for longer could lead to lower consumer spending.
Despite the near-term uncertainty, Home Depot is a solid business at a good value with a growing dividend. Home Depot sports a reasonable P/E of 26.8. It has increased its dividend by around five-fold over the last decade as the business has experienced rapid growth. With a yield of 2.3% and a track record of market-beating returns, Home Depot is a balanced Dow blue chip dividend stock to buy now.
Chevron can support its dividend, even at much lower oil prices
Despite a modest gain in the S&P 500 over the last month, Chevron and the broader energy sector have nose-dived by over 11%. West Texas Intermediate crude oil prices, the U.S. benchmark, are hovering around their lowest levels in a year. The possibility of the Federal Reserve holding interest rates higher for longer could slow economic growth — affecting oil and gas demand.
Despite these challenges, Chevron is a compelling dividend stock to buy now. Chevron has a sizable yield of 4.6% and 37 consecutive years of dividend raises.
Most importantly, Chevron has the margin of error needed to cover its dividend and capital spending plans even if oil prices fall. The company has gradually lowered its cost of production through technological advancements and by investing in high-margin regions like the Permian Basin.
One area of uncertainty is Chevron’s deal with Hess. On Oct. 23, 2023, Chevron announced a deal to acquire Hess in an all-stock transaction valued at $53 billion. But the deal has been delayed due to a dispute over contractual language with ExxonMobil and regulatory pressures. On Sept. 30, the Federal Trade Commission completed its antitrust review of the deal and cleared Chevron to move forward under the condition that Hess CEO John Hess would not be appointed to Chevron’s board.
If the Hess deal goes through, it should help boost Chevron’s free cash flow and diversify its asset base — giving it critical exposure to low-cost offshore reserves in Guyana. However, many exploration and production companies are currently hovering around 52-week lows, so in hindsight, Chevron may have gotten a better deal if it had waited to make an acquisition.
Still, the deal looks like a long-term winner for Chevron. With a rock-solid balance sheet and a dirt cheap valuation, Chevron stands out as an excellent high-yield dividend stock to buy now.
