The best dividend stocks don't always come with incredibly generous yields. Excessive dividend yields are often a sign of deeply troubled stocks, often overvalued and destined to lose that tremendous payout fairly soon. Seasoned income investors know that they should look for other qualities. A reasonable yield is a good start, but a strong commitment to growing payouts over time is much better. If the dividend checks are financed by rock-solid cash flows, that's even better. And in the end, the underlying business should be poised to deliver these growing, cash-backed dividends for a very long time.
Read on to see how International Business Machines (IBM 0.06%) and American Tower (AMT 0.17%) fit the bill as world-class dividend stocks, each in its own unique way.
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IBM: A generous dividend aristocrat
Big Blue recently joined the exclusive club of Dividend Aristocrats. A symbolic payout increase from $1.62 to $1.63 per share ensured that IBM's payouts have been rising without interruption for 25 straight years. The dividend checks have actually been sent out every quarter since 1916, with a few bumps along the way.
The company's commitment to rising dividends is very real. When IBM had a hard time covering its dividend expenses with free cash flows in the years after the dot-com crash, it took on additional debt to keep the shareholder-friendly payouts coming. Three major recessions in the last 25 years didn't stop IBM's dividend increases. Game-changing $40 billion acquisitions couldn't stop them, either.
It's not all wine and roses in Armonk, NY. The stock hasn't impressed anyone since the strategy shift toward software, services, cloud computing, and artificial intelligence started in 2012. $10,000 invested in IBM when Ginny Rometty took over as CEO would be worth $11,000 today. Over the same period, a $10,000 investment in the S&P 500 would have soared to more than $38,000.
The Big Blue wheels are taking their sweet time to find serious traction but that only sets the stock up for greater returns when IBM finally finds its footing. The company is an established leader in the key sectors I mentioned earlier, and all of them represent massive growth opportunities over the next couple of decades. Meanwhile, IBM shares are trading at just 12 times forward earnings and 12.4 times free cash flows, bundled with a 4.6% dividend yield. That's the power of steady dividend boosts amid stalled stock price trends.
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American Tower: A growth story with legs
Cell tower operator American Tower is a different story. Organized as a real estate investment trust (REIT), American Tower is required to pay out at least 90% of its taxable income in the form of dividends, in order to qualify for blanking out its corporate tax payments. REITs send their excess cash directly to shareholders rather than to Uncle Sam.
As long as American Tower's profits are rising, so will its dividend payouts. The company's cash flows used to depend on rising interest in basic cellphones, then in SMS messaging, and then the rise of smartphones rolled in. A few generations of network upgrades later, American Tower has built a nationwide tower network with even larger interests abroad. 5G networks are the next broad-based growth story here as every wireless carrier worth its salt is upgrading its tower installations to the new standard -- and adding more locations to take advantage of high-speed 5G connections with shorter range.
It's easy to play buzzword bingo with American Tower. The company benefits from 5G networking, which ties directly into the Internet of Things and edge computing. It's an international growth stock with dependable long-term customer contracts. All of these business trends flow into American Tower's financial results. Revenues more than doubled over the last 7 years while free cash flows tripled. Dividend payouts nearly quadrupled in the same period.
If IBM's below-market stock returns make you uneasy, American Tower could fit your profile better. This stock has gained 187% in the 7-year period discussed above, including an 85% growth spurt in the last three years. When dividend payouts rise in tandem with stock prices, you get a relatively stable dividend yield. American Tower's yield keeps bouncing between 1.5% and 2%, sitting near the upper end of that range today.
