Saturday, April 1, 2017

Dividend Smackdown: IBM Stock vs. MSFT Stock

We look at dividend yield, income growth and prospects for big tech juggernauts IBM and MSFT



Ring the bell because it’s that time again. We’re putting two iconic dividend payers in the ring for an old-school dividend smackdown. The fighters: Two old-school tech giants, Microsoft Corporation (NASDAQ:MSFT) and International Business Machines Corp. (NYSE:IBM).

At first this might seem like a bout between two washed up has-beens. Both of these companies are ancient by tech company standards, and neither gets the headlines they used to. Yet longevity in the tech space is something to take seriously. If you’re able to survive decades in an industry known for rapid upheaval, you’re clearly doing something right.
Yet no fighter’s streak lasts forever. Even Mike Tyson eventually got knocked out, by underdog Buster Douglas. And in our match today, one company is well into a bona fide comeback, whereas the other is at risk of getting knocked out … permanently.
So with that, let’s go ringside in this battle between IBM stock and MSFT stock starting with the current dividend yield.

Dividend Yield

In a world where the S&P 500 yields just 1.9%, both Microsoft and IBM have to be considered relatively high-yield stocks. Microsoft stock sports a dividend yield of 2.4% and IBM 3.2%. So, in a head-to-head match up, IBM is clearly the higher yielder.
Furthermore, at first glance, IBM’s dividend would appear to be more sustainable. IBM stock is only paying out 44% of current earnings per share, whereas MSFT is payout out a much higher 69%.
So, in round one of this dividend smackdown, we have a clear winner: Big Blue.
Dividend Yield Winner: IBM

Dividend Growth

For round two, let’s take a look at dividend growth. After all, the current dividend yield only gets you so far, as a dividend stock without a growing dividend is essentially just a riskier version of a bond. A good dividend stock should have both a respectable current yield and a dividend growth rate well in excess of inflation.
Well, both of our fighters qualify here. Microsoft has raised its dividend for 13 consecutive years, and IBM has raised its dividend for 17.
Over the past 10 years, both stocks have been aggressive dividend raisers, but one has clearly taken the lead. Microsoft has raised its payout by a cumulative 300%, which would crush nearly any competitor other than IBM. Big Blue has managed to raise its dividend a cumulative 400%.
Over the past five years, MSFT stock has the edge, beating out IBM stock by a cumulative 125% to 87%. But in round two, I’m going to have to give the edge to IBM.
Dividend Growth Winner: IBM

Future Prospects

Thus far, it has been a lopsided contest, with IBM taking the first two rounds. So is the match over? Or is Microsoft about to mount a comeback worthy of Rocky Balboa?
Let’s take a look.



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