A lot of investors are treating Apple (AAPL -1.51%) like a mature dividend stock these days. And why not? Apple's payouts have grown every year since the dividend policy was introduced in 2012. The dividend is also backed by Apple's unmatched cash machine and nearly $200 billion of cash reserves, plus long-term investments.
Apple's dividend is nice enough, but International Business Machines (IBM -2.08%) provides an even better combination of high-and-rising payouts plus future shareholder returns.
What's so special about IBM's dividend?
You won't find a company with a stronger commitment to generous payouts than Big Blue. Really, you won't.
At a time when many dividend payers are freezing or reversing their annual payout increases or even pausing the whole dividend idea until the coronavirus pandemic crisis blows over, IBM delivered another year-over-year increase in April. It wasn't huge, but that boost pushed IBM into the exclusive club of Dividend Aristocrats -- companies that have delivered annual dividend increases without interruption for at least 25 years.
IBM is keeping its commitment to strong dividends in the face of COVID-19 uncertainty and with a debt-loaded balance sheet due to the $34 billion Red Hat acquisition. "Our overall shareholder payout remains at a comfortable level and we remain fully committed to our dividend," CFO Jim Kavanaugh said in IBM's first-quarter earnings call. "We have ample free cash flow and liquidity to support our business and secure our dividend."
In my mind, there's no realistic scenario where IBM will be forced to halt or reduce its dividend payouts. I don't even see Big Blue ending its streak of annual payout increases any time soon.
But wait, there's more
To be fair, Apple's also maintained its dividend increases in the coronavirus era. Cupertino will be able to continue that policy for years to come, even if its business runs into a dead end with limited growth and weaker profit margins.
That's not good enough for me.
- IBM's 5.5% dividend yield is far superior to Apple's 0.9%.
- Apple's stock is arguably overvalued at 30 times trailing earnings and 31 times free cash flows. At best, you might call the tech giant "fairly valued." Meanwhile, IBM trades at bargain-bin valuation ratios such as 12 times earnings and 16 times free cash flow.
- IBM has positioned itself as a leader in important high-growth markets like artificial intelligence, cloud computing, and data security. The Red Hat buyout only accelerated these ambitions, putting Big Blue even further ahead of the field. Apple is making a mint in the smartphone sector but the company's attempts to expand into wearables and entertainment services haven't been inspiring.
One of these companies is spring-loaded for massive growth as its data-centric business model uncoils over the next few years. You can lock in a massive dividend yield before that game-changing surge happens.
The other one is Apple. Invest accordingly.