Which High-Yield Dow Stock Would You Rather Own?
The Dow Jones Industrial Average is packed to the rafters with quality businesses and stocks. One sign of the blue-chip index's eye for quality is that all 30 members pay regular dividends nowadays.
But the Dow's dividends come in various shapes and sizes. Bank of America provides a measly 0.3% yield and hasn't increased its payouts at all since the 2008 market panic. The megabank had the opportunity to ask regulators for permission to boost its dividend policy this spring, but it skipped that option and asked for a bigger share-buyback budget instead.
Needless to say, income investors aren't flocking to Bank of America lately. It's easy to find a simple savings account at your friendly neighborhood bank that offers a better interest rate. Ironically, Bank of America's own savings and money-market accounts lag far behind the national averages, making the stock's dividend yield look generous by comparison.
On the other end of the dividend spectrum, you'll find three Dow stocks with yields north of 4%. AT&T leads the pack with a generous 5.2% yield, followed by fellow telecom giant Verizon Communications at 4.2%. Microprocessor maker Intel rounds out the high-yielder list at 4.1%.
Higher yields often make for the best long-term returns, as the company shares a lot of its cash directly with shareholders. Based on that logic, Ma Bell would be the obvious first choice for Dow investors with an eye on long-term income streams.
But it's not that easy. Intel actually holds a serious advantage over both of the telecoms in one very important regard. See if you can figure out what I'm talking about, based on this chart:
Growing dividends is arguably more important than offering a strong yield in the short term. Intel has boosted its payouts by an average of 27.4% over the last 10 years, and that adds up to more than a tenfold multiplication of the quarterly dividend checks. It's the fourth quickest dividend increase on the Dow, and leaves the telecoms far behind.
AT&T has boosted its payouts by just 3.6% a year over the same period, still beating Verizon's 3% growth rate. That's most definitely not the kind of relentless stream of dividend increases that makes income investors drool uncontrollably. Intel's, on the other hand, is exactly that.
In the long run, Intel's yields are rising while AT&T and Verizon stagnated. Past performance is no guarantee of future returns, but I wouldn't bet against Intel's yield eclipsing all the other Dow stocks in a year or two.
The unstoppable dividend boosts are one reason why I own Intel stock myself, and not the seemingly stronger dividend payers from the telecom sector.
Income investing is a surprisingly complex strategy, and the most obvious bets aren't always the best ones in the long term. Taking Intel over AT&T's superior first-day yield is just one example of the many knots that investors must untangle. If you're an investor who prefers returns to rhetoric, you'll want to read The Motley Fool's new free report "5 Dividend Myths... Busted!" In it, you'll learn which stocks provide premium growth and whether bigger dividends are better. Click here to keep reading.
The article Which High-Yield Dow Stock Would You Rather Own? originally appeared on Fool.com.Fool contributor Anders Bylund owns shares of Intel, but he holds no other position in any company mentioned. Check out Anders' bio and holdings or follow him on Twitter and Google+. The Motley Fool owns shares of Intel. Motley Fool newsletter services have recommended buying shares of Bank of America. Motley Fool newsletter services have recommended creating a bull call spread position in Intel. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.
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