Stocks with large dividend payments can be great for investors seeking additional sources of income. These investments are even more appealing when the juicy yields spring from well-known companies. International Business Machines Corp. (NYSE: IBM) and Mattel (NASDAQ: MAT) are two such names with high yields. But are these yields that investors can bank on?
Let's compare IBM and Mattel on a handful of dividend-related measures to see which one is the better dividend stock pick.
Dividend investors are always drawn in by a nice yield. Mattel is the clear winner in this category. IBM has a yield of around 3.5%, compared with a yield of 4.9% for the toymaker.
Mattel's gaudy yield, however, is a result of a recent poor earnings report. For the first quarter, sales for the maker of Barbie were down 6% compared with the same quarter last year, and the company reported a loss of $73 million.Mattel has been dealing with declining sales of Barbie for years now, and the news from the earnings report caused the stock price to drop sharply, making the yield even larger.
IBM is facing its own troubles in the form of business segments that are no longer growing.Management is trying to shift to higher-growth business segments such as cloud computing, but the transition is slow and the stock price is down 9% over the past year. This drop, as with Mattel, has added to IBM's yield.
Can the companies continue to pay their dividends? To answer this question we look at the payout ratio, which is simply a measure of how much of a company's earnings it pays out as dividends. If the company is using most or all of its earnings to pay dividends, then it might not be sustainable, since businesses need to retain a part of earnings for continued growth.
Mattel is the big loser by this measure, paying out about 140% of its earnings in dividends. That's worrisome, because the company reported a loss of $0.21 per share in its first-quarter earnings report.If this trend continues, the toymaker will likely cut its dividend.
IBM, on the other hand, has a payout ratio of 37%, which should be sustainable. Although Big Blue reported both revenue and earnings declines in its most recent earnings report, the company still has plenty of room to continue paying its dividend.
Recent dividend increases
Not surprisingly, Mattel recently declared a quarterly dividend that's unchanged from last year, at $0.38 per share. This isn't welcome news for dividend investors who want to see growth in their dividend payments, but it makes sense given the company's recent earnings troubles.
Long-term dividend growth
If we pull back and take a look at the broader picture for dividend growth, we find huge differences between IBM and Mattel. IBM has boosted its payout annually for the past 20 years, and over the past decade, it has grown its dividend by 373%. Mattel's dividend, on the other hand, has remained flat for the past two years at $0.38 per share and has grown by 134% over the past decade.
IBM's increases have averaged a fairly steady 15% over the past five years, while Mattel's have bounced from 0% to 35%. Also, Mattel had a two-year period of flat growth at the end of the past decade. Clearly, IBM is the winner when it comes to long-term dividend growth.
Ultimately, although Mattel is paying a dividend yield close to 5%, it hasn't always been able to raise its payout, and the current level may not be sustainable. IBM, on the other hand, has a fairly juicy yield of around 3.5% and plenty of room to cover its dividend payments even as it figures out where growth might come from. In the dividend battle, Big Blue comes out on top.
Adam Brownlee owns shares of International Business Machines. The Motley Fool has no position in any of the stocks mentioned. 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.