How Dividends Change the Game for Wal-Mart Stock

The wealth-building power of compound interest will never cease to amaze me. It's a story of patience and attention to detail, where small, short-term differences add up to massive divergence over decades. And in the end, the biggest winners don't always deliver the fattest share-price returns.

Today, I'm looking at retail king Wal-Mart (NYSE: WMT  ) . Sam Walton's store chain offers investors a modest dividend yield of 2.5% today, which is just below the 2.7% average yield among the 30 Dow Jones (DJINDICES: ^DJI  ) members. However, it's actually a pretty generous payout in the context of Wal-Mart's long term dividend history:

WMT Dividend Yield (TTM) Chart

WMT Dividend Yield (TTM) data by YCharts.

It's not that Wal-Mart doesn't boost its dividend checks on a regular basis. In fact, you can set your clock by its payout increases. The company hardly even skipped a beat in the 2008 market crisis.

However, as reliable as Wal-Mart's annual dividend boosts may be, they tend to come in small packages. The next chart shows you how fellow Dow member Intel (NASDAQ: INTC  ) has crushed its dividend accelerator pedal over the last decade, while Wal-Mart has only adjusted its cruise control a bit.

WMT Dividend Chart

WMT Dividend data by YCharts.

Intel has increased its dividend by an average of 18% a year since 2003. Its annual payment hikes average out to 27%.

The difference between these two squiggles explains why Intel gives investors a 4% yield today while Wal-Mart lags far behind. This would be forgivable if Wal-Mart were under fundamental pressure to preserve its cash flows, which tends to put the brakes on dividend increases. But the retail empire uses just 49% of its free cash flows to fund quarterly dividend checks -- in the same ball park as Intel's 45% cash payout ratio.

In all fairness, Wal-Mart's dividends have nearly doubled investor returns over the past 10 years. Wal-Mart's dividend-powered returns failed to keep up with the Dow's raw, dividend-less gains, but they still trounced Intel's total returns.

Looking ahead, I don't expect Wal-Mart to suddenly put the dividend-boosting pedal to the metal. The business model is very mature, and the law of large numbers plays a big part here. If anything, Wal-Mart's payout increases may have to slow down at this point. Fundamental metrics like revenue, net income, and free cash flows are all growing more slowly than Wal-Mart's long-term dividend increases.

WMT Revenue TTM Chart

WMT Revenue TTM data by YCharts.

Wal-Mart's payouts may not be the best, but they're still tied to a business model with nearly unshakable staying power. Further, dividend stocks can make you rich. While they don't garner the notoriety of highflying growth stocks, they're also less likely to crash and burn. And over the long term, the compounding effect of the quarterly payouts, as well as their growth, adds up faster than most investors imagine. With this in mind, our analysts sat down to identify the absolute best of the best when it comes to rock-solid dividend stocks, drawing up a list of nine that fit the bill. To discover the identities of these companies before the rest of the market catches on, you can download this valuable free report by simply clicking here now.


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