Dan Ferris recommended computing giant IBM (IBM) in the August 2012 issue of Extreme Value. IBM is the largest information-technology (IT) services company in the world. And it’s the second-largest software company in the world.

IBM is typical of the kinds of stocks Dan calls “World Dominators.” These are companies with consistently thick profit margins, high returns on capital, and huge free cash flow. And they treat shareholders well.

IBM has all those attributes. And it’s one of the greatest companies in history at rewarding its shareholders.

From the August 2012 Extreme Value:

There are two financial clues that tell us a corporation is rewarding shareholders. The first is share repurchases. When a company buys back its own shares, it signals that the management thinks its stock is cheap. It also gives existing shareholders a larger piece of the “pie.” The fewer slices of pie, the bigger your slice.

Frankly, IBM is one of the all-time greatest share repurchasers of the last decade or so. Its share count was 1.76 billion in 2000. As of its latest quarterly report – filed just a few days ago – the share count is just 1.14 billion. That means shareholders have seen their piece of the pie increase by more than 35% over the last 12 years.

In fact, since 2000, IBM has spent a total of $111 billion on share repurchases. That’s a little more than double the $51 billion of capital expenditures it made during that time. A business that pays more to its owners than it needs to reinvest in the business is exactly what you want. Through 2015, IBM expects to spend another approximately $50 billion on share repurchases. Let’s think about that for a minute…

Right now, IBM’s market cap is $220 billion. At current prices, you could buy back more than one-fifth of the company’s shares with $50 billion. Hypothetically, we could see at least a 22% gain in the share price by 2015 on share repurchases alone. But that’s not the only way we’ll make money through buying shares today…

But share repurchases are only one way a company can reward shareholders. The other is with dividends. IBM is also a relentless dividend-grower…

The final financial clue is dividend growth. IBM has raised its dividend every year for the last 16 years. Over the past 10 years, its dividend has grown at an average rate of 18.1% per year. (IBM has paid a dividend every year for 96 years in a row.)

The current yield on the stock is less than 2%, which will turn most dividend-focused investors off. But that’s because most investors simply don’t understand that buying a business with all the financial clues that can grow its dividend at high, inflation-beating rates for decades is far more important than getting a high current yield.

Plenty of scared investors are hiding out in Treasury bonds. They’re way too obsessed with safety right now. That’s why the 10-year Treasury note interest rate recently hit an all-time low of 1.39%. After 2% inflation, that’s a negative return. These scared investors are agreeing to have the value of their capital destroyed each year in return for safety.

Yet if you accept IBM’s 1.9% yield today, you’re likely to see your income raised by a fat, double-digit number (probably in the mid-teens) within the next year. You’ll destroy inflation rather than having inflation destroy you.

When Dan wrote that issue, IBM was paying an $0.85-per-share quarterly dividend. It paid a $0.95-per-share dividend in May 2013 – a 12% increase.

[ad#Google Adsense 336×280-IA]And Tuesday, IBM announced it would raise its dividend another 16% to $1.10 a share.

Following the increase, IBM will yield 2.25%.

This is the 19th consecutive year the tech giant has raised its quarterly dividend… And the 11th straight year of double-digit percentage increases.

Shares of IBM rallied 1% on the news.

Simply buying and holding these world-dominating businesses is one of the best ways to safely increase your wealth over time… But it’s boring.

And most people don’t have the patience to sit and let these companies work their magic.

There’s no better way to beat inflation than by holding shares of companies that increase their dividends at a double-digit annual pace. And because these companies relentlessly repurchase their shares, your stake in their earnings grows over time.

If you bought IBM when Dan recommended it in August 2012, your quarterly dividend payment has already grown nearly 30%. If you were collecting $1,000 a month in dividends, you’re now collecting almost $1,300.

These growing dividends add up…

Consider this bit from Warren Buffett’s 2010 letter to Berkshire Hathaway shareholders…

Coca-Cola paid us $88 million in 1995, the year after we finished purchasing the stock. Every year since, Coke has increased its dividend.

In 2011, we will almost certainly receive $376 million from Coke, up $24 million from last year. Within 10 years, I would expect that $376 million to double. By the end of that period, I wouldn’t be surprised to see our share of Coke’s annual earnings exceed 100% of what we paid for the investment. Time is the friend of the wonderful business.

It’s worth noting that Buffett is also IBM’s largest shareholder, with a nearly $13 billion position.

— Sean Goldsmith

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Source: The Growth Stock Wire