Boeing vs. Caterpillar: 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 of the world's leading heavy industrial manufacturing companies -- one on land, one in the air -- will square off in a head-to-head battle to determine which offers a better dividend for your portfolio.

Tale of the tape
Founded in 1916, Boeing (BA 0.53%) is one of the world's largest commercial jet manufacturers (ranking either first or second in any given year), and is the second-largest aerospace and defense contractor in the world, behind only Lockheed Martin. Boeing is also a component of the Dow Jones Industrial Average, reflecting its importance to the American economy. Headquartered in Chicago, the company serves both commercial and military customers in over 150 countries, and is one of the largest U.S. exporters by sales. Boeing's Next-Generation 737 tends to be the world's most popular jet airliner, and most of its other jets are mainstays on airport tarmacs around the world as well.

Founded in 1925, Caterpillar (CAT 0.39%) is the world's largest manufacturer of construction and mining equipment, and ranked among the top 50 Fortune 500 companies in the U.S. for 2012. Caterpillar is also a component of both the Dow. Headquartered in Peoria, Ill., Caterpillar traces its roots from the merger of the Holt Manufacturing Company and the C.L. Best Tractor Company. The company has grown through a number of acquisitions over the past decade, including Shin Caterpillar Mitsubishi in 2008, Caterpillar Xuzhou and MWM Holding in 2010 and Bucyrus International in 2011. Caterpillar heavy machinery is as common at construction and excavation sites as Boeing's jets are at airports, which makes this a classic battle of land versus air.

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)
Boeing began paying annual dividends in 1942 but switched to quarterly dividends in 1954, which adds up to a 71-year dividend-paying streak. Caterpillar, on the other hand, had been making dividend payments since 1950s, but ceased during the 1960s and did not resume payments until 1982. This one's an easy win for Boeing.

Winner: Boeing, 1-0.

Round two: stability (dividend-raising streak)
According to Dividata, Boeing has been increasing its dividend payouts at least once per year since 2004, but the company held its dividends firm between 2010 and 2011. By contrast, Caterpillar's increased its dividend payments at least once every year since 1994, which lets it win the stability crown without any hassles.

Winner: Caterpillar, 1-1.

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:

BA Dividend Yield (TTM) data by YCharts

Winner: Caterpillar, 2-1.

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 look at the growth in payouts over the past five years.

BA Dividend data by YCharts

Winner: Caterpillar, 3-1.

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:

BA Cash Dividend Payout Ratio (TTM) data by YCharts

Winner: Boeing, 2-3.

Bonus round: opportunities and threats
Caterpillar 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.

Boeing opportunities:

• Boeing has record orders worth more than $95 billion for its 777X jet.
• Etihad Airways ordered 30 787-10 Dreamliners worth more than $8.7 billion.
• Boeing expects the Middle East's aviation market to reach $550 billion within the next two decades.
• Boeing can capitalize on increased demand for missile defense systems in emerging markets.

Caterpillar opportunities:

• Caterpillar has trimmed North American operations to reduce costs.
• Caterpillar has a $20.4 billion order backlog despite poor macroeconomic conditions.
• It has launched an accelerated $1 billion capital-return plan to boost shareholder confidence.
• Caterpillar can gain much from a rebound in key international markets, especially in China and the rest of Asia.

Boeing threats:

• The U.S. government aims to cut defense spending by $1 trillion over the next nine years.
• Boeing workers rejected an eight-year contract extension offer.
• Boeing's 787 Dreamliner has experienced many operational deficiencies since launch.

Caterpillar threats:

• Caterpillar reduced its full-year guidance by 15% because of uncertainty in the mining industry.
• Low commodity prices have hurt demand for Caterpillar's heavy industrial equipment.

One dividend to rule them all
In this writer's humble opinion, it seems that Boeing has a better shot at long-term outperformance. Both companies face unique macroeconomic headwinds over the coming decade, but Caterpillar's increasing reliance on mining -- a floundering sector -- and its historical dependence on construction growth are both major drawbacks in a world where construction has stalled and commodity prices have plunged. Despite major defense cutbacks and glitches in the next-gen 787, Boeing still stands to gain from the continued surge in long-distance flights around the world, particularly in regions that are just now beginning to enjoy significant middle-class expansions. 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!