Monsanto vs. Whole Foods: 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 companies at opposite ends of the American food-production chain -- one in the fields and one at the checkout line -- will square off in a head-to-head battle to determine which offers a better dividend for your portfolio.

Tale of the tape
Founded in 1901, Monsanto (MON) is one of the world's leading producers of genetically modified seeds, and its flagship product, Roundup, ranks among the world's best-selling herbicides. Monsanto was the first company to genetically modify a plant cell, and has since transformed itself into the leading face of GM seed through several mergers and spin-offs since 1997. Monsanto has more recently completed some notable acquisitions as well -- Delta & Pine Land in 2007 and Climate Corp. in 2013 -- to strengthen its position in the global GM seed markets.

Founded in 1980, Whole Foods Market (WFM) is the world's largest natural and organic foods supermarket chain. Headquartered in Austin, Texas, the company's grown to a footprint of more than 340 stores throughout the U.K., Canada, and the United States. Whole Foods has fueled its rapid growth by opening new stores and by acquiring other natural-food chains -- Nature's Heartland, Fresh Fields Markets, Bread & Circus, and Wellspring Grocery have all been acquired to add to Whole Foods' footprint.

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)
According to Dividata, Whole Foods began paying quarterly dividends in 2004, which amounts to a nine-year streak. The organic food purveyor falls short of Monsanto's streak, which began in 2001.

Winner: Monsanto, 1-0.

Round two: stability (dividend-raising streak)
Monsanto sports a decade-long dividend-raising streak since it has been increasing quarterly dividends at the end of each year since 2003, according to Dividata. On the other hand, Whole Foods held fast on its dividend payouts from 2009 to 2010. Since Whole Foods dividend-raising streak only started in 2011, Monsanto coasts to the stability crown without breaking a sweat.

Winner: Monsanto, 2-0.

Round three: power (dividend yield)
Some dividends are enticing, but 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.

MON Dividend Yield (TTM) data by YCharts

Winner: Whole Foods, 1-2.

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.

MON Dividend data by YCharts

Winner: Whole Foods, 2-2.

Round five: flexibility (free cash flow payout ratio)
A company that pays out too much of its free cash flow in dividends could be at risk of a cutback, particularly if business weakens. We want to see sustainable payouts, so lower is better.

MON Cash Dividend Payout Ratio (TTM) data by YCharts

Winner: Monsanto, 3-2.

Bonus round: opportunities and threats
Monsanto 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.

Monsanto opportunities

• Monsanto announced a $400 million expansion plan of its Chesterfield Valley Research Center.
• Monsanto completed the acquisition of Climate Corporation in a deal worth $930 million.
• It has acquired Sensako and Carnia, which control half of the South African maize market.
• It has launched first-ever South American biotech trait, Intacta RR2 PRO soybeans, in Brazil.
• It focuses on the massive demand for food in emerging markets.

Whole Foods opportunities

• Consumers have begun shifting from GM to organic or natural foods.
• The global organic food market would grow at a CAGR of 13% to $104.7 billion by 2015.
• Whole Foods has been expanding into lower-income areas and smaller markets in the United States.

Monsanto threats

• Many countries have passed legislation to prohibit the cultivation of certain GM crops.
• Health concerns over GM ingredients and foods could hurt biotech seed producers.

Whole Foods threats

• Whole Foods faces fierce competition from rival Sprouts Farmer's Market.
• Kroger has been expanding into Whole Foods' core Southeast and Mid-Atlantic markets.
• Whole Foods has been sued by Californian regulators for selling pesticides within its stores.

One dividend to rule them all
In this writer's humble opinion, it seems that Whole Foods has a better shot at long-term outperformance, because of a longer growth runway (Monsanto already owns a big chunk of a maturing market) and a stake in the shift toward more healthful eating. Biotech seed producers like Monsanto have been facing strong resistance from people around the world, which may hinder future growth prospects. Whole Foods Market could benefit from this same trend, which will fuel rapid demand for organic and natural foods. 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!