The "Dogs of the Dow" strategy is a simple, yet effective investing strategy. It calls for investors to buy the highest-yielding stocks in the Dow Jones Industrial Average, then rebalancing annually.

Income investors in particular are likely to favor the Dogs of the Dow strategy, as it focuses specifically on the Dow stocks with the highest dividend yields.

International Business Machines (IBM) is the top Dog of the Dow for 2019, as it has the highest dividend yield of any Dow component at 4.5%. IBM’s high dividend yield is the result of a long streak of annual dividend increases, along with a flat-lining share price over the past few years.

Business Overview and Recent Events

IBM is a technology giant with a market capitalization of $123.5 billion. IBM is in the process of a significant turnaround. IBM’s fourth-quarter revenue of $21.8 billion fell 3.5% from the same quarter last year, continuing a concerning trend of revenue declines. Global Business Services and Cognitive Solutions posted revenue growth of 2% and 6%, respectively. Technology Services & Cloud Platforms was flat for the quarter. But growth in these areas was more than offset by declines of 9% in Global Financing and 20% in Systems.

IBM has experienced a long structural decline in its legacy hardware and manufacturing businesses. In response, the company launched a turnaround based on new growth initiatives like big data, security, and the cloud. It has utilized acquisitions to accelerate its turnaround effort. For example, last year IBM announced the acquisition of Red Hat Inc. for $190 per share, representing a total enterprise value of $34 billion. Red Hat generates annual revenue of about $3 billion and operates in the open-source software market, primarily distributing technology products used in data centers. IBM made the deal to boost its cloud platform, which is one of its most important growth areas.

IBM is investing heavily for growth and is finally seeing a return on its investment. IBM’s Strategic Imperatives, which include the cloud, open source, analytics, and data; collectively grew revenue by 9% in 2018. Total cloud revenue increased 12% to $19.2 billion in that time. Red Hat will further expand the company’s cloud infrastructure, giving IBM a good chance of returning to EPS growth in the near future.

This Dog Still Has Bite

IBM is not a highly attractive stock for growth investors, as the company’s turnaround is ongoing. But for income investors, IBM is an attractive dividend stock. IBM has increased its dividend for 23 consecutive years, including a solid % hike in 2018.

Even though IBM’s earnings growth has slowed in recent years, the company still has room to raise its dividend each year, thanks to a low payout ratio. The company is projected to have a dividend payout of 58% for 2019, which leaves plenty of room for annual dividend increases moving forward.

With a long history of annual dividend increases and a current 4.5% yield, IBM is a "Dog of the Dow" stock with plenty of bite left.

Ben Reynolds is CEO of Sure Dividend. Sure Dividend helps individual investors build high quality dividend growth stock portfolios for the long run.