Are the Top Dow Dividends Sustainable?

The Dow Jones Industrial Average is jam-packed with great dividend stocks. All 30 of the elite index's members pay a dividend today, with an average yield of 2.6%. The twin telecom giants, AT&T (NYSE: T) and Verizon (NYSE: VZ) , lead the pack with respective yields of 5.1% and 4.2%. Good luck finding a savings account or CD matching these annual payouts. Even the least generous yield on the Dow blows today's money market accounts out of the water.

But when the prudent income investor digs deeper into the Dow telecoms' dividend policies, there's a bit of a shock waiting just under the surface. Verizon's payout ratio is a massive 508%, meaning that the company spends its net income five times over just to keep the quarterly checks coming. Ma Bell's ratio is a still-eyebrow-raising 135%. Fools need to understand the difference between earnings and cash flows -- and one reason for AT&T or Verizon investors to relax about those insane income-based payout ratios. The numbers are simply a byproduct of sensible tax strategies -- not a red flag for the staying power of their dividends.

Source: Motley Fool

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