Dividend stocks outperform non-dividend-paying stocks over the long run. It happens in good markets and bad, and the benefit of dividends can be quite striking: Dividend payments have made up about 40% of the market's average annual return from 1936 to the present day. But few of us can invest in every single dividend-paying stock on the market, and even if we could, we might find better gains by being selective. That's why we'll be pitting two of the Dow Jones Industrial Average's (DJINDICES: ^DJI ) dividend payers against each other today to find out which Dow stock is the true dividend champion. Let's take a closer look at our two contenders now.
Tale of the tape
3M (NYSE: MMM ) is a Jack-of-all-manufacturing-trades for the Dow. The Minnesota-based company (the first "M" stands for its state of origin) will soon reach its 37th Dow-niversary, and it will celebrate as it typically does: by working hard to develop innovative new industrial products. Since its founding in 1902, 3M has become a leading producer of a wide range of products, including bandages, cleaning products, paint, filtration, and sticky notes. 3M's consistency will make it a formidable opponent to its challenger...
Bank of America (NYSE: BAC ) joined the Dow in early 2008, which turned out to be a real disaster for the index's returns. However, the second-largest bank by assets in America is undoubtedly a worthwhile representative of the U.S. financial sector. Not only is Bank of America a dominant player in commercial banking, but its crisis-era purchase of Merrill Lynch also established it as the world's largest wealth-management company. Unfortunately, the financial crisis has weakened Bank of America, and its persistent mortgage-related problems have prevented it from paying a similar dividend to its megabank peers. Can Bank of America prevail, or will industry triumph over finance today in our dividend battle?
Trailing-12-month profit margin
TTM free-cash-flow margin*
Five-year total return
Source: Morningstar and YCharts. *Free-cash-flow margin is free cash flow divided by revenue for the trailing 12 months.
Round one: endurance
3M's dividend history stretches all the way back to 1916, so it will soon celebrate its dividend centennial. Bank of America is a far more recent entrant to the dividend game, as Dividata only records payments as far back as 1986, when it was still largely based in California.
Winner: 3M, 1-0
Round two: stability
Paying dividends is well and good, but how long have our two companies been increasing their dividends? The same dividend payout year after year can quickly fall behind a rising market, and there's no better sign of a company's financial stability than a rising payout in a weak market (so long as it's sustainable, of course). 3M is a dividend aristocrat, and its streak of payout growth dates back to 1959. Bank of America, which has yet to raise its payout from the nominal penny-per-share level to which it was reduced during the financial crisis, simply can't compete.
Winner: 3M, 2-0
Round three: power
It's not that hard to commit to paying back shareholders, but are these payments enticing or merely token? Let's take a look at how both companies have maintained their dividend yields over time as their businesses and share prices have grown:
MMM Dividend Yield data by YCharts.
Bank of America might be able to push its payout above 3M's in the future, but it certainly hasn't maintained a strong yield for some time.
Winner: 3M, 3-0
Round four: strength
A stock's yield can stay high without much effort if its share price doesn't budge, so let's take a look at the growth in payouts over the past five years. If you bought in several years ago and the company has grown its payout substantially, your real yield is likely much better than what's shown above.
MMM Dividend data by YCharts.
Winner: 3M, 4-0.
3M blows Bank of America out of the water and moves on to the next round of the Dow dividend tournament. However, Bank of America's persistent weakness shouldn't be permanent, and it might soon become a much stronger dividend stock once its long-standing subprime problems have been worked through its system. Would you invest in Bank of America today in the hopes of getting some hefty dividends in the future, or is the financial giant better considered a momentum play in a recovering economy, to be avoided the next time things take a turn for the worse?
While dividend stocks don't garner the notoriety of highflying growth stocks, they're also less likely to crash and burn. And over the long term, the compounding effect of the quarterly payouts, as well as their growth, adds up faster than most investors imagine. Our analysts recently sat down to identify the absolute best of the best when it comes to rock-solid dividend stocks, drawing up a list in this free report of the only nine that fit the bill. To discover the identities of these companies before the rest of the market catches on, you can download this valuable free report by simply clicking here now.