With the markets essentially flat both for 2011 and for the past several years, dividends have never been more important as a way to eke out some positive returns from your portfolio. Yet when it comes to dividends, some stocks are better at giving you what you need than others.

Many dividend investors focus purely on raw dividend yield, such as AT&T (NYSE: T) and its Dow-leading 6% yield. By picking high-yield stocks, you don't have to wait to get the income you need. On the other hand, stocks with high dividend yields often have them for a reason -- and those payouts can disappear like a thief in the night.

That's why I prefer to look at stocks that have demonstrated an ability to grow their dividends over time. They don't always have the highest payouts now, but in the long run, they'll make you just as rich -- if not richer.

Today, I'm looking at the five stocks from the Dow Jones Industrials (INDEX: ^DJI) that have seen the fastest dividend growth over the past five years. Here they are:


P/E Ratio

Current Yield

5-Year Average Annual Dividend Growth

IBM (NYSE: IBM) 14.4 1.7% 22.9%
McDonald's (NYSE: MCD) 19.3 2.8% 19.5%
Wal-Mart (NYSE: WMT) 12.5 2.5% 16.5%
Disney (NYSE: DIS) 14.7 1.7% 14.1%
Intel (Nasdaq: INTC) 10.4 3.6% 13.9%

Source: S&P Capital IQ. As of Dec. 22.

Two things about this list are somewhat surprising. First, three of the stocks are aimed largely at consumers and are generally considered somewhat defensive plays. Both McDonald's and Wal-Mart, for instance, saw their shares rise during 2008, which was a terrible year for the overall stock market. You wouldn't necessarily expect defensive stocks to be leaders in any kind of growth, but over time, they've had the wherewithal to boost their payouts consistently and significantly since 2006.

The other surprising thing is that two tech companies are on the list. The tech sector is well known as one of the last holdouts on joining the dividend bandwagon. But Intel has been a leader in this regard, with the fastest growth rate since 2001 and the healthiest dividend yield of the five stocks listed here.

Will it last?
So the big question every dividend investor needs to ask is whether companies can sustain their strong dividends. Let's take a closer look at these Dow stocks:

  • IBM has made a massive shift from hardware to tech services over the years. The high-margin revenue that comes in from those services not only makes it easier for IBM to pay its dividends but also builds a stronger base for future business, making IBM more comfortable with financial projections down the road.
  • McDonald's has had 35 straight years of dividend increases, yet its business seems only to get better. With same-store sales rising even in Europe, it seems like nothing can stop the Golden Arches from its quest toward world fast-food domination.
  • Wal-Mart demonstrates just how valuable dividends can be as a key component of total return. The stock's price has fallen slightly from where it traded near the beginning of 2002, but when you factor in dividends, you've earned a total return of more than 15%. Valuations now look a lot more attractive than they did back then.
  • Disney has done nothing but add to its arsenal of strong prospects over the years. Acquisitions of Pixar and Marvel have resulted in some of the studio's greatest recent hits, and the cross-selling that results from those franchises are enormous. Disney will only continue to make money from them in the future.
  • Intel has the lowest earnings multiple on the list, as many investors fear the extinction of the PC. But contrary to popular opinion, Intel has plenty of life left from emerging markets, and you shouldn't expect the billions it spends each year in research and development to go wasted in getting deeper into mobile.

Show me the money
If you want dividends that will keep growing over time, then these five stocks are a great place to focus your attention. Although there's more to picking a stock than merely dividend growth, income investors recognize the importance of paying a dividend in reflecting the overall stability of the company as a whole.

But if you want even more good ideas for the best dividend stocks, I won't disappoint you. The Motley Fool's latest special free report on dividends has 11 stocks that should fit the bill. Go ahead -- claim your free copy before it's gone.

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.