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A 5%-Plus Dividend Yield That Deserves Your Respect

Kristin Orman, Research Director, The Oxford Club

Kristin Orman

They say you never forget your "first." And if "they" are talking about laptop computers, in my case, they're right.

Shortly after I began working on a trading desk, my company assigned an IBM ThinkPad to me. The machine was a beast. I could run Bloomberg and my trading software from anywhere in the world.

I thought I was pretty hot stuff... sometimes I still do.

The same can't be said for IBM's (NYSE: IBM) stock price. Since the turn of the century, IBM's share price has risen less than 1% on average a year.

During that same time period, IBM's annual dividend per share has grown a staggering 1,285%, from $0.47 in 1999 to $6.51 last year. That translates into a juicy 5.1% yield.

Yet Big Blue is the Rodney Dangerfield of dividend stocks. It gets no respect.

Despite its impressive track record of more than 25 years of dividend raises, IBM is recognized more for being a Dog of the Dow than for being a Dividend Aristocrat.

But IBM is no dividend dog.

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Revenue has stagnated over the past 21 years, but cash flow has remained robust. IBM has even managed to grow it nearly 25%, from $13.5 billion in 2017 to $15.6 billion last year.

But this year, free cash flow is expected to take a nosedive by more than 44% to $8.5 billion. IBM is preparing to spin off its infrastructure business by the end of 2021 to concentrate on its higher-growth artificial intelligence (AI) and hybrid cloud business.

Chart - IBM's Free Cash Flow
 

That drop-off shouldn't concern investors too much. Big Blue will still have more than enough cash coming in the door to fund another dividend raise.

This year, IBM is expected to pay out $6 billion in dividends. Its payout ratio is projected to rise to 69% this year from 37% in 2020. That's still well below SafetyNet Pro's usual 75% comfort level.

What Is SafetyNet Pro?
SafetyNet Pro is a groundbreaking tool that predicts dividend cuts with stunning accuracy. With it, you can determine the dividend safety rating of nearly 1,000 stocks. Access to SafetyNet Pro is reserved exclusively for subscribers of Marc's newsletter, The Oxford Income Letter. To learn more about SafetyNet Pro and The Oxford Income Letter, click here now.
 

Free cash flow is expected to resume its rise in 2022, growing to $11.7 billion.

Plus, IBM has more than $13.8 billion in cash on its balance sheet to backstop any further free cash flow declines, making IBM one of the safest 5%-plus yields in the market today.

Dividend Safety Rating: A

Dividend Grade Guide
 

If you have a company whose dividend you'd like to have analyzed, leave the ticker symbol in the comments section.

Good investing,

Kristin

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