Corning Incorporated vs. International Paper Company: Which Stock's Dividend Dominates?

Dividend stocks outperform non-dividend-paying stocks over the long run. It happens in good markets and bad, and the benefit of dividends can be quite striking -- dividend payments have made up about 40% of the market's average annual return from 1936 to the present day.

But few of us can invest in every single dividend-paying stock on the market, and even if we could, we're likely to find better gains by being selective. Today, two manufacturers representing opposite ends of the materials spectrum -- advanced electronics protection and old-fashioned writing and packaging products -- will square off in a head-to-head battle to determine which offers a better dividend for your portfolio.

Tale of the tape
Established in 1851, Corning (GLW -0.06%) is the world's largest manufacturer of specialty glass and ceramics. The company designs, develops, and sells components -- including glass substrates, ceramic substrates and optical biosensors -- which go into high-tech systems in many industries, including the semiconductor, aerospace, defense, astronomy, and metrology fields. Corning has research and development centers in North America, Europe, and Asia, and employs more than 30,000 people worldwide. The company also operates two major joint ventures, Dow Corning and Samsung Corning Precision, which primarily manufacture silicon- and glass-based products, respectively, for a wide range of high-tech applications.

Established in 1898 by the merger of 18 pulp and paper mills, International Paper (IP 0.93%) is a global leader in paper, packaging and fluff pulp. Headquartered in Memphis, Tenn., the company has manufacturing facilities in North America, Latin America, Asia, Russia, Europe, and North Africa, and has more than 70,000 employees in over 24 countries to serve customers around the globe. International Paper also distributes printing, packaging, graphic arts and industrial products from over 88 branches in the United States and 32 branches in Canada, Mexico, and Asia. It built up its business over the past several decades by acquiring several major competitors, including Hammermill, Masonite, and Zanders Feinpapiere AG in the 1980s and 1990s.

Source: Morningstar and YCharts.
* Free cash flow margin is free cash flow divided by revenue for the trailing 12 months.

Round one: endurance (dividend-paying streak)
Corning halted its dividends from 2001 through 2006 before reinstating its payouts at a slightly reduced rate (reduced from 2001's levels) in 2007. However, International Paper has paid dividends without interruption for more than 68 years since its first distributions in 1946. That makes this an easy win for International Paper.

Winner: International Paper, 1-0.

Round two: stability (dividend-raising streak)
According to Dividata, International Paper has only been increasing its dividend payouts at least once per year since 2010 after a sizable reduction during the financial crisis. That five-year dividend-raising streak seems somewhat puny, but in contrast, Corning has only been increasing its quarterly dividend payments annually since 2011. Corning comes up short again here.

Winner: International Paper, 2-0.

Round three: power (dividend yield)
Some dividends are enticing, but others are merely tokens that barely affect an investor's decision. Have our two companies sustained strong yields over time? Let's take a look:

GLW Dividend Yield (TTM) data by YCharts

Winner: International Paper, 3-0.

Round four: strength (recent dividend growth)
A stock's yield can stay high without much effort if its share price doesn't budge, so let's take a look at the growth in payouts over the past five years.

GLW Dividend data by YCharts

Winner: International Paper, 4-0.

Round five: flexibility (free cash flow payout ratio)
A company that pays out too much of its free cash flow in dividends could be at risk of a cutback, particularly if business weakens. We want to see sustainable payouts, so lower is better:

GLW Cash Dividend Payout Ratio (TTM) data by YCharts

Winner: Corning, 1-4.

Bonus round: opportunities and threats
International Paper may have won the best-of-five on the basis of its history, but investors should never base their decisions on past performance alone. Tomorrow might bring a far different business environment, so it's important to also examine each company's potential, whether it happens to be nearly boundless or constrained too tightly for growth.

Corning opportunities

• Corning has a long-term LCD display glass supply agreement with electronics giant Samsung.
• Intel recently began shipping ultra-fast fiber optic cables co-developed with Corning.
• Corning plans to sell Gorilla Glass to automotive and architectural clients this year.
• Corning will capitalize on anti-microbial glass for touch-enabled notebooks.
• Gorilla Glass is roughly 1.6 times lighter and 10 times cheaper than sapphire crystal.

International Paper opportunities

• Soros Fund Management acquired a position due to growth in the cardboard-packaging business.
• The company announced a $1.5 billion share repurchase program.
• International Paper's cardboard-packaging sales should grow as e-commerce orders continue to boom.

Corning threats

• Gorilla Glass is suffering weaker demand from smartphone and tablet makers.
• Prices for LCD glass are expected to decline further as volume grows through 2014.
• Longtime key customer Apple (NASDAQ: AAPL) filed a patent application for sapphire substrates.
• GT Advanced Technologies continues to drop the cost of sapphire crystal displays.

International Paper threats

• International Paper's plagued by the growing importance of digital communications worldwide.
• International Paper may face weak demand and rising inventories due to sluggish macroeconomic conditions.
• The company decided to shut down its Alabama manufacturing plant in response to lower demand for uncoated free-sheet paper.
• Rival Packaging Corporation of America acquired Boise to boost its production capacity.

One dividend to rule them all
In this writer's humble opinion, it seems that International Paper has a better shot at long-term outperformance, thanks to its impressive long-term success story, which includes a successful transition from forestry, wood products, and chemicals to a focus on industrial and consumer packaging. The company's new operations in Russia, China, Brazil, and India have also given it a foothold in fast-growing developing markets. CEO John Faraci has been emphasizing restructuring initiatives to maintain higher revenues and profit margins.

Corning boasts over 160 years of materials-science experience, and has ambitious plans to expand into new markets this year, but nonetheless appears to be on the verge of losing a key partnership with Apple as the smartphone industry matures. Corning's inability to sustain earnings growth (its EPS has been essentially flat since the iPhone launched in 2007) as smartphone use has exploded also speaks poorly of its ability to profit over the long term from smaller screens. You might disagree, and if so, you're encouraged to share your viewpoint in the comments below. No dividend is completely perfect, but some are bound to produce better results than others. Keep your eyes open -- you never know where you might find the next great dividend stock!