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Despite strong rally, dividend yields still attractive

Trader on the floor of the New York Stock Exchange, November 22, 2013.
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Trader on the floor of the New York Stock Exchange, November 22, 2013.

Even with the sharp gains in stock prices this year, 70 percent of the Dow components still offer dividend yields greater than 2 percent.

Thirteen of the 30 companies in the Dow have dividend yields greater than the 10-year U.S. Treasury, which was yielding around 2.7 percent Tuesday. The current average dividend yield of the Dow stands at 2.52 percent as companies kept pace with stock prices by raising dividends, but the average is down about 40 basis points from the beginning of the year.

Since then, the Dow is higher by about 3,000 points, which has pushed yields lower.

"Investors need to be cautious and look at valuations along with dividend yields," says Art Hogan, Chief Market Analyst at Lazard Capital Markets. "I expect the market to continue its run, and potentially rise another 12 percent next year, but I am still focused on fundamentals."

The Dow Jones Industrial Average is up nearly 23 percent year-to-date, on pace for its largest gain in a decade. The Dow, closed at a record 16,072.54 Monday, scoring its 42nd record close this year.

Hogan also favors stocks over bonds, and highlights that with corporate cash on balance sheets at record levels, the trend in capital distribution in the form of dividends and stock buybacks should continue. Companies, using record low bond yields to issue debt, have been using the proceeds to issue dividends and buy back stock.

Twenty-four Dow members, or 80 percent of the index, increased their dividend payments so far this year, according to figures by S&P Capital IQ. Some of those names include: Verizon, 3M, American Express, Caterpillar, Chevron, Cisco, among others.

But as Hogan highlights, investors shouldn't worry about just chasing yield and should first make sure the underlying fundamentals justify the price.

Highest dividend yields of the Dow

Ticker
Company
Price
YTD % Chg.
Div. Yield
T AT&T 35.37 4.92 5.09
VZ Verizon 50.01 15.58 4.24
INTC Intel 23.75 15.18 3.79
MRK Merck 49.66 21.3 3.46
MCD McDonald's 98.92 12.14 3.28
CVX Chevron 123.74 14.43 3.23
CSCO Cisco 21.27 8.25 3.2
PFE Pfizer 32.14 28.15 2.99
MSFT Microsoft 37.64 40.92 2.98
DD Du Pont 61.58 36.91 2.92
CAT Caterpillar 84.4 -5.81 2.84
GE General Electric 26.73 27.35 2.84
PG Procter & Gamble 85.41 25.81 2.82
KO Coca-Cola 40.37 11.37 2.77
JNJ Johnson & Johnson 95.63 36.42 2.76
XOM Exxon Mobil 95.09 9.87 2.65
JPM JPMorgan Chase 57.65 31.11 2.64
WMT Wal-Mart 80.43 17.88 2.34
TRV Travelers 90.79 26.41 2.2
UTX United Technologies 110.31 34.51 2.14
IBM IBM 178.94 -6.58 2.12
HD Home Depot 79.75 28.94 1.96
MMM 3M 131.23 41.34 1.94
UNH UnitedHealth 74.07 36.56 1.51
BA Boeing 133 76.49 1.46
GS Goldman Sachs 169.48 32.86 1.3
NKE NIKE 79.13 53.35 1.21
AXP American Express 84.59 47.16 1.09
DIS Disney 69.74 40.07 1.08
V Visa 201.93 33.22 0.79
Source: CNBC Analytics


—BY CNBC's Giovanny Moreano. Follow him on Twitter: @giovannymoreano

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