This article is part of our weeklong series on 11 incredible dividend stocks. You can get the low-down on this series by clicking here.

The business
If you've never heard of Wal-Mart, you have the all-clear to leave the safety of your fallout shelter. The world's largest retailer, Wal-Mart traces its roots back to 1945, the year Sam Walton opened a variety store in Newport, Ark. The first Wal-Mart Discount City store opened for business in 1962. Today, the company is organized into three segments:

  • Wal-Mart U.S. contributed 62% of the company's fiscal 2011 sales, operating stores in all 50 states in a range of formats, along with the U.S. online retail offering, Competitors: Target (NYSE: TGT), Costco (Nasdaq: COST), Sears Holdings (Nasdaq: SHLD), Best Buy (NYSE: BBY), Kohl's, Safeway (NYSE: SWY), etc.
  • Wal-Mart International (26% of 2011 sales) covers retail operations in 14 countries outside the U.S., both bricks-and-mortar and online. Competitors: Carrefour, etc.
  • The Sam's Club unit (12% of 2011 sales) operates membership warehouse clubs in the U.S. and the associated online property, Competitors: Costco, BJ's Wholesale Club (NYSE: BJ).
Company Wal-Mart Stores (NYSE: WMT)
Dividend Yield 2.7%
5-Year Dividend Growth Rate 15.6%
Payout Ratio 27.7%
Has Been Paying a Dividend Without Interruption Since March 1974

Why it's incredible
There are numerous extraordinary facts about Wal-Mart -- it's a company of superlatives. For example, it's the world's largest employer, with 2.1 million associates. It's also the world's largest company by revenue -- $419 billion in fiscal 2011. If it were a country and had a GDP, Wal-Mart would be ranked 22nd, ahead of Sweden, Ireland, South Africa, or Hong Kong.

These numbers relate to Wal-Mart's size, but that's not really what sets the company apart. What is truly remarkable about Wal-Mart is the speed with which it achieved its current size. Wal-Mart is a champion compounding machine in everything from its operations to its long-term share performance. From the close of its first day of trading on Aug. 25, 1972, Wal-Mart shares have generated an annualized return of more than 20%.

Of course, as the size of your base increases, it becomes increasingly difficult -- and ultimately, impossible -- to sustain high growth rates. Nevertheless, Wal-Mart's size is instrumental to Wal-Mart's competitive advantage as a low-cost provider. The company's command of logistics and information technology also contributes to its moat.

To quote Warren Buffett: "The key to investing is not assessing how much an industry is going to affect society, or how much it will grow, but rather determining the competitive advantage of any given company and, above all, the durability of that advantage." That advantage looks rock-solid in Wal-Mart's case. We can assume that Buffett thinks so, since Berkshire Hathaway (NYSE: BRK-B) is one of the company's largest shareholders, with a stake worth $2 billion at the end of March.

Dividend strength
Wal-Mart is dividend stock royalty -- literally: The stock is part of the S&P 500 Dividend Aristocrats index, which requires that its members demonstrate an extraordinary pedigree: 25 consecutive years of dividend increases. Wal-Mart handily clears that bar, having increased its annual dividend every year since it declared its first cash dividend in March 1974. However, we're not discussing antique furniture here -- a long and venerable history is no guarantee of ongoing value. When we refer to dividend strength, we are referring to a company's ability to continue paying (increasing) dividends in the future.

To try to gauge the dividend's sustainability, let's take a look at the company's payout ratio -- the proportion of the profits it pays out in dividends.

  FY 2011 FY 2010 FY 2009 FY 2008 FY 2007
Payout Ratio 27.1% 29.3% 28% 28.2% 24.8%

That ratio looks conservative -- not only sustainable, it suggests there is room to raise the dividend. Of course, net income isn't cash. If we calculate the same ratio on the basis of free cash flow rather than net income, this is the equivalent table:

  FY 2011 FY 2010 FY 2009 FY 2008 FY 2007
Payout Ratio 63.5% 31.7% 39.6% 90.8% 78.6%

These numbers are higher and more volatile than the previous ones. Nevertheless, I don't think they pose any problem, particularly if one remembers the massive capital expenditures Wal-Mart has undertaken to grow its business. That level of investment will ultimately decline, freeing up cash that can be returned to shareholders in the form of share buybacks -- or dividends.

The greatest risks are the hurdles on Wal-Mart's growth path. In the U.S., Wal-Mart is now being forced to push into urban centers rather than the suburban locations it has now virtually saturated. This is an environment it is unfamiliar with, which presents a new set of challenges.

International markets -- which will become an ever larger source of growth -- can throw up thorny political problems (as the recent acquisition of South Africa's Massmart demonstrates), in addition to different consumer preferences. Wal-Mart has shown that it doesn't always understand its target market outside the U.S.; as a result, it has had mixed success abroad. In 2006, it withdrew from Germany and South Korea, for example.

In sum
Wal-Mart is an incredible company. Will it continue to grow over the next 20 years at the same pace that it did over the previous 20? Certainly not, but that needn't trouble investors. The strength of Wal-Mart's position in the retail landscape and its opportunities for growth across product categories and foreign markets should translate into above-average returns with below-average risk. Dividend-oriented investors can consider that the company's dividend is secure and that it will be a growing contributor to future returns. Wal-Mart is a suitable long-term holding in even the most conservative dividend portfolio.

If you're not convinced, there are still more dividend stock ideas among the 13 High-Yielding Stocks to Buy Today. You can read all about them by clicking here.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.