Alcoa vs. American Express: Which Dow Stock's Dividend Dominates?

Dividend stocks outperform non-dividend-paying stocks over the long run. It happens in good markets and bad, and the benefit of dividends can be quite striking: Dividend payments have made up about 40% of the market's average annual return from 1936 to the present day. But few of us can invest in every single dividend-paying stock on the market, and even if we could, we might find better gains by being selective. That's why we'll be pitting two of the Dow Jones Industrial Average's (^DJI 0.73%) dividend payers against each other today to find out which is the true dividend champion. Let's take a closer look at our two contenders now.

Tale of the tape
Alcoa (AA) has been a member of the Dow since 1959 and is the only remaining metals company on an index that once tilted heavily toward extractive industries. Based in Pittsburgh, home of the Steelers, aluminum-focused Alcoa has survived the globalization of the metals industry better than many of its old neighbors. Today, it's the third-largest aluminum-producer in the world with more than 3.5 million metric tons of annual production capacity.

American Express (AXP 2.28%) is a 31-year veteran of the Dow, and it was the first financial-services component in the index's history. Founded in 1850, AmEx has become the world's prestige credit card, issuing far fewer cards than the leading two processors but charging much higher per-user rates. AmEx serves as a lender as well as a processor, which enables greater profit streams in good times but can also run the risk of deep losses during financial crises.

Both of these companies can be buffeted by economic headwinds, but has this put either dividend payment at risk? We'll soon find out.

Source: Morningstar; YCharts.
*Free-cash-flow margin is free cash flow divided by revenue for the trailing 12 months.

It may not be much of a contest here. Can Alcoa fend off the cash-rich AmEx, or will investors decide that it's better to get charged up with the credit card processor?

Round one: endurance
According to Dividata, Alcoa has been paying dividends for more than 50 years. You might expect AmEx to match this streak of consistency, but that's not the case: AmEx began paying dividends in 1977, only five years before it joined the Dow. The miner pulls out a major win to take an early lead.

Winner: Alcoa, 1-0

Round two: stability
Paying dividends is well and good, but how long have our two companies been increasing their dividends? The same dividend payout year after year can quickly fall behind a rising market, and there's no better sign of a company's financial stability than a rising payout in a weak market (so long as it's sustainable, of course). Unfortunately, Alcoa slashed its dividend coming out of the financial crisis and has yet to raise it again. AmEx, on the other hand, just raised its payout last year, and although it hasn't been increasing payouts every year, it hasn't reduced them since 1977, either.

Winner: American Express, 1-1

Round three: power
It's not that hard to commit to paying back shareholders, but are these payments enticing or merely token? Let's take a look at how both companies have maintained their dividend yields over time as their businesses and share prices have changed:

AA Dividend Yield data by YCharts.

This is too close to call. Alcoa's in the lead now, but AmEx was ahead for much of the post-recession period. Let's call this one a...

Tie: 1-1.

Round four: strength
A stock's yield can stay high without much effort if its share price doesn't budge, so let's take a look at the growth in payouts over the past five years. If you bought in several years ago and the company has grown its payout substantially, your real yield is likely much better than what's shown above.

AA Dividend data by YCharts.

Winner: American Express, 2-1.

Round five: flexibility
A company needs to manage its cash wisely to ensure that there's enough available for tough times. Paying out too much of free cash flow in dividends could be a warning sign that the dividend is at risk, particularly if business weakens. This next metric analyzes just how much of their free cash flows our two companies have paid out in dividends over the past four quarters:

AA Cash Div. Payout Ratio TTM data by YCharts.

Winner: American Express, 3-1.

It wasn't really close this time. Despite coming in a bit late to the game, AmEx bests Alcoa where it counts to take the dividend crown. Alcoa appears to be in some ways a relic of an earlier time, when America defined itself by the output of its foundries and the size of its factories. AmEx, on the other hand, points the way toward a post-cash future -- which, unfortunately for Alcoa, looks a lot more plastic than metal. Will this be the case over the long haul? It's hard to say, but right now Alcoa finds itself in a deep hole to climb out of.