There are a handful of reasons to love dividend stocks; most notably, of course, is their quarterly cash payments to shareholders. Still, picking the best dividend stocks to buy isn't always easy. To help investors searching for quality dividend stock ideas, these two dividend stocks represent a good foundation for a dividend investor's portfolio: IBM (NYSE:IBM) and Intel (NASDAQ:INTC).
International Business Machines, also known as IBM, is a particularly interesting investment because it is now one of Berkshire Hathaway's (NYSE:BRK.B) (NYSE:BRK.A) largest investments. Berkshire Hathaway, of course, is famed investor Warren Buffett's company, which has consistently outperformed the stock market over the long haul by buying enduring companies and holding them for decades. The company's notable 8.3% stake in IBM represents a $12.2 billion bet that the company is undervalued. By buying IBM, therefore, investors can at least take comfort in the fact that they are in the company of the world's greatest investor.
Despite the stock's challenging run over the past 12 months, falling about 9%, Berkshire Hathaway CEO Warren Buffett said in a CNBC interview in May that it's more likely Berkshire will buy more IBM stock in the next 12 to 24 months than the Buffett-led company is to sell shares.
A close look at IBM's business suggests the stock truly does trade conservatively. IBM trades with a price-to-earnings ratio of just 11.4. Further, IBM's dividend represents substantial dividend yield of 3.8%, yet still leaves plenty of room for dividend growth; the company is only paying out about 39% of its earnings in dividends.
Importantly, IBM has a strong recent history of substantial dividend increases. Between 2011 and 2015, the tech giant's dividend increased at an average annualized rate of 14.6%.
Now may be a good time to follow Buffett's lead and pick up some shares of this enduring business.
Intel stock isn't as conservatively priced as IBM, but it's still not expensive by any measure. It trades with a P/E ratio of about 13.9 -- not bad considering analysts, on average, anticipate Intel's EPS to increase by about 3.4% this year, 9% next year, and 10% annually over the next five years.
Intel's dividend looks solid. Its yield of 3.3% falls short of IBM's 3.8% yield, but it's still robust. And, like IBM, Intel's dividend has plenty of room to grow; the company's dividend payments currently only represent about 42% of earnings.
Further, Intel has a history of dividend increases. Indeed, during the past four years, Intel's dividend has increased at an average annualized rate of 5.3%. Notably, Intel did pause its annual dividend increases in 2014, but management's decision to at least keep the dividend at the same level, and to quickly resume annual increases the next year, highlights the company's priority to giving dividend investors a reliable stream of income.
These two dividend stocks possess three key characteristics: enduring business models with a proven track record, conservative valuations, and a meaningful dividend yield. Dividend stocks don't get much better than this.