This original tech giant is trouncing the market in 2025 – and pays a solid dividend

CNBC

6 days ago

An old school, tech workhorse is having a rough post-earnings session, but has still managed to trounce the S & P 500 in 2025 – and also rewards long-term investors who are seeking portfolio income. International Business Machines sold off sharply Thursday, down more than 8%, as investors punished the tech company when it missed Wall Street's estimates for software revenue in the second quarter . Software revenue for IBM came in at $7.39 billion, up about 10% from the year-ago period, but below the StreetAccount consensus estimate of $7.43 billion. IBM YTD mountain IBM shares in 2025 The software revenue overshadowed an otherwise solid quarter for IBM, when adjusted earnings came in at $2.80 per share on revenue of $16.98 billion, topping the $2.64 per share and $16.59 billion LSEG consensus. The 114-year-old tech bellwether also lifted its full-year cash flow guidance to more than $13.5 billion. "We believe that IBM is well-positioned to capitalize on the current demand shift for hybrid and [artificial intelligence] applications with more enterprises looking to implement AI for productivity gains and drive this long-term profitable growth," Wedbush Securities analyst Dan Ives said in a Thursday note. He said he would be a buyer "of any knee-jerk weakness" post earnings. Those who do snap up IBM shares while they're on sale – and stick with them for the long run – could be rewarded. The original blue chip tech stock has been steadily raising its dividend for decades, and investors who use each quarter's income to buy more shares could see enhanced returns over time. A dividend aristocrat Dating back to 1926, dividends have contributed about 31% of the total return of the S & P 500, while capital appreciation has contributed 69%, according to S & P Global . IBM is in an elite crowd of stocks, known as the dividend aristocrats. These are companies that have raised their annual dividend for at least 25 consecutive years. For its part, IBM has now increased its dividend for 30 straight years, with the company most recently announcing a hike in April to $1.68 a share. IBM has a current dividend yield of 2.6%, and its annual dividend payment per share adds up to $6.72. But the real power of the income payment comes in the form of compounding growth over time and using those dividends to buy more shares. On a price basis, IBM shares are up 18% in 2025, but its total return – factoring in reinvested dividends – is closer to 20%, according to FactSet calculations. That compares to an 8% increase on a price basis for the S & P 500 this year, and an 8.9% total return. Where investors really see the difference, though, is when they stick with a stock for the long run and make a point of reinvesting those dividend payments. Over the past 20 years, IBM's share price went up more than 220%, but on a total return basis the appreciation comes to more than 490%, reflecting the reward investors receive not just from buying additional stock but also from receiving added dividends on all those newly-accumulated shares. A way to dollar-cost average Investors can check with their brokerage firm to enroll in dividend reinvestment plans, which are known as DRIPs. The benefit of enrolling in a DRIP is that it allows investors to dollar-cost average into a position, meaning they buy shares at regular intervals regardless of the price action. There's no waiting for fire sales. You'll want to be picky about which names you reinvest in, though. Stocks with unreasonably high dividend yields may be on a downward trajectory, and companies that are under pressure may be forced to cut their payments to save cash. Investors can also consider diversifying their approach and snap up a dividend-focused ETF instead. The Vanguard Dividend Appreciation ETF (VIG) has an expense ratio of 0.05% and a return of 7.3% in 2025. Its constituents include Broadcom, Microsoft and Costco Wholesale. Meanwhile, the ProShares S & P 500 Dividend Aristocrats ETF (NOBL) has an expense ratio of 0.35% and a 2025 return of nearly 6%. Names in the fund include Emerson Electric, Caterpillar and Fastenal.