Which High-Yield Dow Stock Would You Rather Own?

The Dow Jones Industrial Average (DJINDICES: ^DJI  ) is packed to the rafters with quality businesses and stocks. One sign of the blue-chip index's eye for quality is that all 30 members pay regular dividends nowadays.

But the Dow's dividends come in various shapes and sizes. Bank of America (NYSE: BAC  ) provides a measly 0.3% yield and hasn't increased its payouts at all since the 2008 market panic. The megabank had the opportunity to ask regulators for permission to boost its dividend policy this spring, but it skipped that option and asked for a bigger share-buyback budget instead.

Needless to say, income investors aren't flocking to Bank of America lately. It's easy to find a simple savings account at your friendly neighborhood bank that offers a better interest rate. Ironically, Bank of America's own savings and money-market accounts lag far behind the national averages, making the stock's dividend yield look generous by comparison.

On the other end of the dividend spectrum, you'll find three Dow stocks with yields north of 4%. AT&T (NYSE: T  ) leads the pack with a generous 5.2% yield, followed by fellow telecom giant Verizon Communications (NYSE: VZ  ) at 4.2%. Microprocessor maker Intel (NASDAQ: INTC  ) rounds out the high-yielder list at 4.1%.

Higher yields often make for the best long-term returns, as the company shares a lot of its cash directly with shareholders. Based on that logic, Ma Bell would be the obvious first choice for Dow investors with an eye on long-term income streams.

But it's not that easy. Intel actually holds a serious advantage over both of the telecoms in one very important regard. See if you can figure out what I'm talking about, based on this chart:

INTC Dividend Chart

INTC Dividend data by YCharts

Growing dividends is arguably more important than offering a strong yield in the short term. Intel has boosted its payouts by an average of 27.4% over the last 10 years, and that adds up to more than a tenfold multiplication of the quarterly dividend checks. It's the fourth quickest dividend increase on the Dow, and leaves the telecoms far behind.

AT&T has boosted its payouts by just 3.6% a year over the same period, still beating Verizon's 3% growth rate. That's most definitely not the kind of relentless stream of dividend increases that makes income investors drool uncontrollably. Intel's, on the other hand, is exactly that.

In the long run, Intel's yields are rising while AT&T and Verizon stagnated. Past performance is no guarantee of future returns, but I wouldn't bet against Intel's yield eclipsing all the other Dow stocks in a year or two.

INTC Dividend Yield Chart

INTC Dividend Yield data by YCharts

The unstoppable dividend boosts are one reason why I own Intel stock myself, and not the seemingly stronger dividend payers from the telecom sector.

Income investing is a surprisingly complex strategy, and the most obvious bets aren't always the best ones in the long term. Taking Intel over AT&T's superior first-day yield is just one example of the many knots that investors must untangle. If you're an investor who prefers returns to rhetoric, you'll want to read The Motley Fool's new free report "5 Dividend Myths... Busted!" In it, you'll learn which stocks provide premium growth and whether bigger dividends are better. Click here to keep reading.

Read/Post Comments (3) | Recommend This Article (7)

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  • Report this Comment On August 21, 2013, at 2:32 PM, jferristx wrote:

    Interesting how just earlier today, there was a Fool article on how Intel was expected to raise their dividend, but didn't...and how they may not be able to. That pretty much wipes out this article. As for Intel versus the telecoms, well, Intel competes on many lines for mobile technology. The telecoms do not care who's technology accesses them, since they are the only game in town.

  • Report this Comment On August 21, 2013, at 2:54 PM, GordonsGecko wrote:

    Intel has now gone 5 quarters without raising their dividend. I wouldn't feel too secure in their ability to raise it consistently going forward. PC sales are plummeting and they have not been able to make true headway in the mobile game yet. I'd rather own IBM.

  • Report this Comment On August 21, 2013, at 3:50 PM, amskwr wrote:

    But during the 3 years I've owned Intel, it has trailed the S&P return by a lot, and the dividend only makes up for some of that. If you believe that the company is still facing growth of its business, then stay invested, but the dividend alone isn't enough. It does temper the instinct to bail based on the points of earlier comments.

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