3 Dividend Stocks to Hold for the Next 20 Years

Key Points

• IBM's 2.4% yield may seem modest today, but the tech giant's AI transformation positions it for accelerating dividend growth.

• Coca-Cola has raised its dividend for 63 consecutive years, and reinvesting those payouts boosted 5-year returns by 48%.

• Altria delivers a massive 7.2% yield while moving from traditional cigarettes to reduced-harm products.

• 10 stocks we like better than International Business Machines ›

The average dividend yield for the S&P 500 index is just 1.2% right now. That's well below the 1.4% average over the past five years, and even further behind an average 10-year yield of 1.7%.

It's good news that the leading market index is on the rise. At the same time, soaring stock prices have the opposite mathematical effect on dividend yields. In this market, S&P 500 funds like the Vanguard S&P 500 ETF (NYSEMKT: VOO) and the SPDR S&P 500 ETF (NYSEMKT: SPY) become less effective for income-oriented investors.

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But you shouldn't give up on dividend stocks. Look around and you'll find a plethora of strong yields just below Wall Street's surface. From the tech sector to household-name consumer goods, it's still easy to find respectable dividend yields tied to cash-machine businesses. For starters, you should consider buying shares of International Business Machines (NYSE: IBM), Coca-Cola (NYSE: KO), and Altria Group (NYSE: MO) today and hold them for 20 years or more.

With yields as high as 7.2%, these business titans should serve your income portfolio well in the long term. You should see serious dividend payouts in the next five years, even greater cash-sharing returns over a full decade, and truly game-changing dividend profits in 20 years or more.

IBM turned strategic pain into dividend gain

IBM has been around for more than a century, surviving a plethora of economic disasters along the way. More recently, Big Blue traded in its full-service enterprise computing strategy for a tighter focus on what it called "strategic imperatives." That was a painful transition, reducing IBM's top-line revenues and driving share prices lower for many years.

But the strategy shift is finally paying off. IBM's strategic imperatives included heavy investments in cloud computing and artificial intelligence (AI). When the game-changing Red Hat buyout closed in 2019, IBM was ready to thrive three years later, when ChatGPT inspired the massive AI boom.

And IBM's dividends never stopped flowing. Big Blue's annual yield stands at a decent 2.4% today -- about double the S&P 500 average. That's a downtrend, mind you, since IBM's stock has been soaring in recent months. Over the past five years, IBM's yield averaged 4.4%.

The company's dividend increases have been merely symbolic since 2020, but I expect the payouts to accelerate pretty soon. IBM is just waiting for the ongoing AI bonanza to boost its free cash flows, and that's already happening.

Coca-Cola keeps the dividend checks flowing

Coca-Cola is an official dividend king, with an unbroken streak of payout increases across the last 63 years. The iconic beverage company has been a mainstay for dividend investors since forever, thanks to its unshakable cash machine of a business model.

The company largely makes and sells beverage concentrate to a global network of bottling partners. It also ships fountain syrups directly to food service customers, skipping the bottler step. Concentrate is a higher-volume business that accounted for 85% of Coke's total sales last year, but the "finished product" category of syrup sales carries a wider profit margin.

All that being said, Coca-Cola stock offers a 2.9% dividend yield today. If you invested $10,000 in Coke stock five years ago, the position would be worth $15,400 today. Reinvesting the dividends in more shares along the way would have brought a total return of $17,970.

Back out the $10,000 investment on both sides of the investor return equations, and you'll see a $7,970 profit with total returns versus $5,390 in plain price gains. That's a 48% increase in actual gains. For the S&P 500 funds, the increase from dividend reinvestments stopped at 15% over the same time span.

Altria proves that old habits die hard

Altria combines some of the finest qualities of IBM and Coca-Cola. The company was incorporated in the 1920s as Philip Morris & Co, and was already a centennial veteran of the tobacco trade at that point. After dabbling in food products and beer-brewing along the way, Altria is back to its tobacco roots in the 2020s. That's the IBM connection, with many decades of successful operations under Altria's belt.

It's also a dividend king like Coca-Cola, with 55 years of consistent annual payout increases. The current dividend yield stands at 7.2%, giving Altria one of the three most generous yields in the S&P 500.

The times, they are a-changing, as consumers seek alternatives to classic cigarettes. However, Altria is ready to roll with the punches. The company realizes that dangerous smoking is going out of style, and aims to replace its old core business with products in the "tobacco harm reduction" area. Altria's tag line these days is "moving beyond smoking."

As a result, alternative products such as vapes, moist smokeless tobacco, and nicotine pouches accounted for 12% of Altria's total revenues last year. That's up from 7% a decade ago.

And Altria's generous dividends make a significant difference to investor returns. Remember how Coca-Cola's total returns jumped 48% above the basic price gains over the past five years? Do the same math for Altria, and you'll see a far greater boost of 162% instead. Altria investments are all about the lucrative dividend payouts.

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Anders Bylund has positions in International Business Machines and Vanguard S&P 500 ETF. The Motley Fool has positions in and recommends International Business Machines and Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.