Philip Morris vs. Yum! Brands: Which 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're likely to find better gains by being selective. Today, two internationally focused consumer giants will square off in a head-to-head battle to determine which offers a better dividend for your portfolio.

Tale of the tape
Philip Morris International (PM 1.39%) is one of the largest tobacco companies in the world. It's only existed as an independent company since Altria (MO 0.12%) divested it in 2008, but it was long a key part of the original Philip Morris empire, which was incorporated in New York City -- still Philip Morris International's headquarters -- in 1902. Today, Philip Morris sells tobacco products in nearly every country in the world, and it controls approximately 16% of the international cigarette market.

Yum! Brands (YUM 1.22%), unlike Philip Morris, retains significant operations in the United States, but it's also one of the most widespread fast-food companies in other countries as well. The Louisville, Ky.-based parent of Taco Bell, KFC, and Pizza Hut is the largest restaurant company by units in the world, with more than 39,000 locations in more than 130 countries. Like Philip Morris, Yum! began its corporate life as a subsidiary of PepsiCo (PEP 3.62%), with which it retains a close working relationship.

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

Round one: endurance (dividend-paying streak)
Both of our companies are fairly recent spinoffs of much older enterprises, so it wouldn't be exactly fair to either of them if we only calculated those streaks that began after independence. Altria has been a longtime favorite of dividend investors, and while it may have begun paying dividends even earlier, the DRIP Investing Resource Center traces its payouts to 1968. PepsiCo has paid dividends since 1965, but unlike Philip Morris, Yum! did not begin paying dividends immediately as an independent company. Those payouts did not begin until 2004, several years after its 1997 spinoff.

Winner: Philip Morris, 1-0

Round two: stability (dividend-raising streak)
Yum! has raised its dividends every year since initiating payments in 2004, but that eight-year (and counting) streak still doesn't come close to the cumulative 44-year dividend-raising streak of pre- and post-divestiture Philip Morris.

Winner: Philip Morris, 2-0

Round three: power (dividend yield)
Hundreds of public companies commit to paying back shareholders each year, but while some dividends are enticing, others are merely tokens that barely affect an investor's decision. Have our two companies sustained strong yields over time? Let's take a look:

PM Dividend Yield (TTM) data by YCharts

Winner: Philip Morris, 3-0

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

PM Dividend data by YCharts

Winner: Yum! Brands, 1-3

Round five: flexibility (free cash flow payout ratio)
A company needs to manage its cash wisely to ensure that there's enough available for tough times. Paying out too much of its 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 well our two companies are managing their cash flows:

PM Cash Dividend Payout Ratio TTM data by YCharts

Winner: Yum! Brands, 2-3

Bonus round: opportunities and threats
Philip Morris may have won the best-of-five on the basis of its history, but investors should never base their decisions on past performance alone. Tomorrow might bring a far different business environment, so it's important to also examine each company's potential, whether it happens to be nearly boundless or constrained too tightly for growth.

Philip Morris opportunities:

• A reliance on buybacks results in greater performance later if its stock languishes now.
• Philip Morris is unconstrained by tightening U.S. tobacco regulations.

Yum! Brands opportunities:

• China continues to be an excellent long-term growth story for Yum!
• Yum! is also an unappreciated leader in African fast-food franchising.
• The company is not afraid to experiment with a more upscale image.
• New menu items (the Doritos Locos taco line) have been monster hits.

Philip Morris threats:

• Many of the company's top brands have experienced declining volumes.
• High levels of payouts and buybacks are outpacing recent cash flows.
• Russia and other large markets are clamping down on tobacco sales.
• The company's shares may actually be overvalued relative to its potential.

Yum! Brands threats:

• A shift toward healthier preferences may undermine Yum!'s domestic growth.
• Recent Chinese numbers were terrible.
• American consumers are eating less fast food than they used to.

One dividend to rule them all
In this humble writer's opinion, it seems that Yum! has a better shot at long-term outperformance, thanks to its longer growth runway and more diversified offerings. Philip Morris, while boasting superior pricing power, has greater regulatory and demographic headwinds to contend with. You might disagree, and if so, you're encouraged to share your viewpoint in the comments below. No dividend is completely perfect, but some are bound to produce better results than others. Keep your eyes open -- you never know where you might find the next great dividend stock!