We recently published a list of 15 Best Dividend Stocks To Buy and Hold. In this article, we are going to take a look at where International Business Machines Corporation (NYSE:IBM) stands against other best dividend stocks to buy and hold.

In recent years, many investors have shifted their focus from dividend-paying stocks to high-growth secular-themed stocks that typically don’t offer dividends. However, history shows that investors shouldn’t overlook dividends. According to estimates by AGF Investments, the long-term case for dividend-paying equities is strong: if a dollar was invested in the broader market Index in 1927 without reinvesting dividends, it would be worth $243 today. In contrast, that same dollar with dividends reinvested would be worth $3,737.

Because of this earnings and income potential, income investors often turn to dividend stocks when the market shifts. While these stocks may not be keeping pace with the broader market, analysts remain optimistic about their future prospects. A report from J.P. Morgan indicated that global equities are approaching a notable period of dividend growth, not just due to a cyclical rise in payouts but also because of a long-term increase in dividend momentum. Over the past 20 years, global dividends per share have grown at an annual rate of 5.6%, but analysts predict this growth will accelerate to 7.6%. The main factor driving this increased growth is the low starting point of payout ratios (dividends as a proportion of earnings). During the Covid pandemic in 2020, many companies cut their dividends, leading to a 12% drop in global dividends, which was a steeper decline than during the Global Financial Crisis. This was a rational response to an uncertain environment with unpredictable effects and duration.

READ ALSO: 10 Most Promising Dividend Stocks According to Hedge Funds

However, equity markets rebounded strongly as global earnings soared, primarily driven by Big Tech and, more recently, AI. Since dividends are typically determined by conservative boards and management, they tend to lag behind earnings during significant earnings surges. As a result, dividend payout ratios are now near their lowest levels in 25 years, meaning companies are paying out less compared to historical averages. Simply returning to a more typical payout level could contribute an additional 2% annual growth over the next five years. This isn’t just a theoretical scenario—global dividend growth has already started to exceed earnings growth in seven of the past eight quarters, as reported by J.P. Morgan.

While recent market gains have largely been driven by a small group of non-dividend-paying companies, this is starting to shift. In 2024, many big tech companies initiated their dividend policies, highlighting the importance of returning capital to shareholders and positioning dividends as a complement to share buybacks. The report highlighted that although the dividend yields from these tech giants are initially modest, the total amount they are committing to dividends is significant—$17 billion collectively over the next year. More importantly, these actions send a strong signal to the market.

Income-focused investors have increasingly turned their attention to dividend income, making it a more prominent part of personal earnings. A report by S&P Dow Jones Indices reveals that dividend income has risen from 2.68% in Q4 1980 to 7.88% in Q2 2024, demonstrating its growing importance as an income source. The report further highlighted that since 1936, dividends have accounted for over a third of total equity returns, with the rest coming from capital gains.

Our Methodology

For this list, we scanned through various credible sources, including Business Insider, Forbes, Morningstar, and Barron’s, and identified their consensus picks from their recent articles. Next, we sorted these companies based on the number of hedge funds in Insider Monkey’s database that owned stakes in these companies, as of Q3 2024.

Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points. (see more details here).

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International Business Machines Corporation (NYSE:IBM)

Number of Hedge Fund Holders: 56

International Business Machines Corporation (NYSE:IBM) is an American multinational technology company. In its recently released Q4 2024 earnings, the company reported $17.6 billion in revenue, reflecting a 1% increase compared to the same period last year. The company ended the year with double-digit revenue growth in its Software segment, fueled by strong momentum in Red Hat. Businesses worldwide are increasingly relying on IBM for AI-driven transformation. Its generative AI business has now surpassed $5 billion in total, growing by nearly $2 billion from the previous quarter.

International Business Machines Corporation (NYSE:IBM) has outperformed the market in the past 12 months, surging by nearly 44%. The company has reinvented itself as a leader in cloud computing and artificial intelligence (AI). Its advancements in hybrid cloud technology and the development of Watsonx AI have solidified its position in the tech industry. However, one area that has received less focus is its progress in quantum computing. IBM is considered a frontrunner in this field, leading some investors to evaluate whether this cutting-edge technology enhances the appeal of its stock.

International Business Machines Corporation (NYSE:IBM), one of the best dividend stocks, has been growing its dividends for 29 consecutive years. The company reported solid cash results for 2024. It generated $13.4 billion in operating cash flow, with free cash flow totaling $12.7 billion. In Q4 2024, IBM returned $1.5 billion to shareholders via dividends. The company’s quarterly dividend comes in at $1.67 per share for a dividend yield of 2.53%, as of February 4.

Of the 900 hedge funds tracked by Insider Monkey at the end of Q3 2024, 56 funds held stakes in International Business Machines Corporation (NYSE:IBM), up from 54 in the previous quarter. The consolidated value of these stakes is more than $1.7 billion.

Overall, IBM ranks 9th on our list of best dividend stocks to buy and hold. While we acknowledge the potential for IBM as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than IBM but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.

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Disclosure: None. This article is originally published at Insider Monkey.