Many investors have found it hard to love IBM (IBM -0.35%) in recent years. The stock has fallen more than 32% over the last 10 years, depriving shareholders of a 216% gain in the S&P 500 market index over the same period. In the same period, IBM's annual dividend payout has nearly doubled while the effective yield more than tripled.
Is IBM still a great dividend stock after all these years of disappointing top-line sales and stock returns? Let's have a look.
What does IBM do nowadays?
The technology giant used to be a universally admired and often copied one-stop-shop for every computing need a business might face. Shedding low-margin operations along the way, Big Blue has refocused on high-growth ideas for the long haul such as cloud computing, data security, artificial intelligence, and blockchain networks.
The shift was effectively completed last November when the company spun off its managed infrastructure services into a new company called Kyndryl. Kyndryl shares have fallen 60% since the split while IBM's stock traded modestly higher. I always thought Kyndryl would be a less interesting investment than IBM, because it consists of some of the least profitable business lines in Big Blue's former portfolio. It looks like market makers agree with my analysis so far:
OK, so what's up with the dividend?
IBM's dividend has increased every year without interruption since 1996. The payout boosts haven't always been impressive, with a slow ramp-up in the first decade and a brake-pumping slowdown during the coronavirus pandemic. But when you put it all together, you'll see a 2,520% total increase. The quarterly payout soared from a split-adjusted $0.0625 per share in 1995 to $1.64 per share today:
IBM Dividend data by YCharts
We already talked about IBM's unimpressive stock performance over the last decade. Pair that trend with relentless payout boosts, and you get a soaring dividend yield:
IBM Dividend Yield data by YCharts
Thanks to this robust dividend policy, Big Blue holds a special place in the market. With an annual yield of 5.2%, IBM is the eighth most generous dividend payer in the S&P 500 index. The rest of the top-ten list consists of the usual suspects, ranging from tobacco brands and telecom stocks to real estate giants and oil producers.
But that's not all. You won't find another pure-play technology company on that list until you see semiconductor titan Intel in spot number 84, sporting a yield of 3.1%. The combination of stellar, dependable payouts and the growth opportunities of a laser-focused technology company sets IBM apart from the rest.
Image source: Getty Images.
Remember the sagging stock chart you saw earlier? If you reinvested your dividends in more IBM stock along the way, the dividend payouts balanced out the lower share prices over the last decade. That's the orange line in the chart below, while the purple line shows the sadder returns you'd get if you didn't put the dividends to work:
What it all comes down to
Yes, IBM is still a great dividend stock. And even if it wasn't, I wouldn't mind buying IBM shares at the affordable valuation ratio of 12 times forward earnings just because I expect impressive stock returns over the next couple of decades. You're getting the best of both worlds here, and at a very reasonable price.
