The Dow Jones Industrial Average (DJINDICES:^DJI) index is packed to the rafters with great dividend stocks. All 30 of the Dow's current members pay a dividend today, with the average yield hovering around 2.7%.
So the Dow makes a great starting point for dividend investors. But how is an income-hungry investor supposed to find the best Dow dividends? They can't all be top-shelf winners, right?
The most obvious answer might be to pick the Dow's juiciest dividend yields.
It's simple enouigh: Rank the 30 Dow stocks by their current yield, and skim the winners off the top. That usually leads you to the Dow's big telecom stocks, and today is no different: AT&T (NYSE:T) rules the roost with a 5.3% yield and Verizon Communications (NYSE:VZ) comes next at 4.3%. No other Dow stock has an effective yield north of 3.6% today.
High yields today don't always translate into big returns in the long run. Let's compare the Dow's highest yielders to IBM (NYSE:IBM), which sports one of the fastest long-term dividend growth rates on the index today:
High yields might rest on low share prices rather than strong business performance. That's not exactly an ideal investment thesis for the long haul.
Income investors are far better served by strong cash flows and a demonstrated willingness to return lots of cash to shareholders. IBM does this almost to a fault. Verizon and AT&T treat dividend raises as a necessary evil -- a chore where "just the bare minimum" is good enough for everybody.
Personally, I would much rather buy IBM for its dividend powers than invest in AT&T's or Verizon's meager long-term payouts.
If the long-term dividend trends weren't reason enough, I would also argue that Verizon and AT&T are fighting tooth and nail to defend antiquated business practices, while business veteran IBM is knee-deep in yet another radical strategy shift in response to changing markets.
I would not be surprised to see IBM's dividend yield leap past both of the Dow telecoms in the next five years, with an even bigger total return gap over several decades. If you're looking for a quick dividend fix right now, AT&T and Verizon might work out fine, but IBM is the safer choice for the true long-term investor.