Remember Einstein's saying that compound interest is the eighth wonder of the world? IBM's (NYSE:IBM) current dividend yield is only 1.99%. However, the company recently raised it by 16%. You may have heard shouts of joy emanating from Omaha, Nebraska. Warren Buffett's company, Berkshire Hathaway, is on track to earn about $258 Million per year in dividends from its IBM holding. A 16% increase means the Oracle of Omaha can expect to receive about an extra $48 million per year in IBM dividends.
The technology hype is all about 3-D printing, cloud, social, and mobile. But what about the original cloud computing? The Mainframe! IBM runs that show, and believe it or not its still profitable. Mobile? Well, just about every time you hit click a button that iPhone or Android device is calling out to a server, and servers are an IBM strong point. If you crave excitement, then follow the hype. If you want long term total returns, then look for boring.
IBM is investing in its core business. This January they announced $1.2 billion in investments to open 15 new data centers across the globe. That brings the total to 40 data centers.
Compounding is the eighth wonder of the world, but it's not fast. You have to have patience. Frankly, you have to think in decades -- not quarters or years. IBM has served its long-term shareholders well. Over the past decade, IBM has shown an admirable dedication to its dividend, quintupling its dividend.
One of the great things about boring companies is that they often grind it out over the long haul. That time lets the dividend compound. IBM has delivered 19.4% annualized dividend growth over the last ten years. As the chart shows, its not just the dividend-IBM shares have delivered price appreciation, too. Sometimes investing isn't about figuring who is the next Tesla or who is the next pets.com. Instead its simply finding a great (yes, boring too) company hiding in plain sight.
Two other measures that show IBM's commitment to its shareholders -- R&D. No, not research and development, repurchases and dividends.
In the last decade, IBM has steadily increased its dividend payout ratio, which is the percent that it pays to shareholders in cash. Its currently sitting at 26% which is near double that of a decade ago, but its still very much in the safe zone with room to grow.
On top of that IBM has aggressively bought back shares, the share count has fallen from over 1.7 billion shares down to around 1 billion shares. Those dividends and buybacks serve increase the shareholder yield, and shareholder yield is what matters -- not having a cool whizbang company to talk about at a cocktail party.
When Buffett bought IBM a lot of people were surprised that he bought a tech stock, but IBM has delivered the opposite of what you see in a lot of tech stocks. Most tech stocks you get no dividend, you see more shares issued (shareholder diluted), and a lack of focus on the long term. By contrast, IBM continues to raise its dividend and payout ratio, buys back shares at cheap prices, reduces share count, and maintains a long term focus. The end result is a tech stock with Buffett characteristics.
Gunnar Peterson owns shares of Berkshire Hathaway and International Business Machines. The Motley Fool recommends Berkshire Hathaway. The Motley Fool owns shares of Berkshire Hathaway and International Business Machines. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.