Dividend stocks outperform non-dividend-paying stocks over the long run. It happens in good markets and bad, and the benefit of dividends can be quite striking -- dividend payments have made up about 40% of the market's average annual return from 1936 to the present day. But few of us can invest in every single dividend-paying stock on the market, and even if we could, we might find better gains by being selective. That's why we'll be pitting two of the Dow Jones Industrial Average's dividend payers against each other today to find out which Dow stock is the true dividend champion. Let's take a closer look at our two contenders now.

Tale of the tape
Microsoft is a 13-year veteran of the Dow. Hailing from Redmond, Wash., Microsoft is the world's largest software company thanks to its early successes in operating systems. Microsoft's story -- more specifically, founder Bill Gates' story -- has been made into a TV movie, and the company became the face of the dot-com boom of the 1990s, when it rose to claim the title of "most valuable company in history." Although Microsoft's market cap is less than half of what it once was, the company's financials have kept growing superbly, allowing it to easily pay out dividends for years.

Mcdonald's is a 27-year veteran of the Dow and is based in Southern California. It's the world's largest publicly traded restaurateur, with more than 34,000 restaurants staffed by more than 1.8 million employees, serving 69 million people in 119 countries every single day. It is the only restaurateur to ever gain a place on the Dow, and this status is reflected by its incredible brand recognition overseas. The company's first grand openings in Russia and China were attended by thousands, and those restaurants remained among the entire company's top producers for many years afterwards.

Statistic

Microsoft 

McDonald's

Market cap

$279.7 billion

$103.2 billion

P/E Ratio

17.3

19.1

Trailing 12-month profit margin

21.6%

19.8%

TTM free cash flow margin*

36.2%

14.2%

Five-year total return 

29.2%

97.7%


Source: Morningstar and YCharts.
*Free cash flow margin is free cash flow divided by revenue for the trailing 12 months.

It looks like software maker Microsoft has the margins to triumph today, but McDonald's is more beloved by the markets. Which stock has what it takes to take the dividend crown?

Round one: endurance
According to Dividata, Microsoft began paying dividends in 2003 and has been paying consistently ever since. That's a reasonable streak, but it's short compared with McDonald's, which began paying dividends in 1976. A 37-year payout streak lets Mickey D's win this contest without breaking a sweat.

Winner: McDonald's, 1-0.

Round two: stability
Paying dividends is well and good, but how long have our two companies been increasing their dividends? The same dividend payout year after year can quickly fall behind a rising market, and there's no better sign of a company's financial stability than a rising payout in a weak market (as long as it's sustainable, of course).

Microsoft has a habit of increasing its quarterly payout at the end of the year, which it avoided doing in 2009 during the financial crisis. However, because of the increases of late 2008 and late 2010, Microsoft has in fact raised its total annual payouts since 2005. McDonald's paid annual dividends from 2000 to 2008, when it switched to a quarterly payout -- but that year its $0.375 quarterly payouts equaled the single $1.50 payout per share of 2007, which means that Mickey D's has only been increasing its dividends since 2009.

Winner: Microsoft, 1-1.

Round three: power
It's not that hard to commit to paying back shareholders, but are these payments enticing, or merely tokens? Let's look at how both companies have maintained their dividend yields over time as their businesses and share prices grow:

MSFT Dividend Yield Chart

MSFT Dividend Yield data by YCharts

Winner: McDonald's, 2-1.

Round four: strength
A stock's yield can stay high without much effort if its share price doesn't budge, so let's look at the growth in payouts over the past five years. If you bought in several years ago and the company's grown its payout substantially, your real yield is likely look much better than what's shown above. This one looks to be just as close as the last one:

MSFT Dividend Chart

MSFT Dividend data by YCharts

Winner: Microsoft, 2-2.

Round five: flexibility
A company -- even one as well positioned as Microsoft or McDonald's -- needs to manage its cash wisely to ensure that there's enough available for tough times. Paying out too much of its free cash flow in dividends could be a warning sign that the dividend is at risk, particularly if business weakens. This next metric analyzes just how much of their free cash flows our two companies have paid out in dividends over the past four quarters:

MSFT Cash Div. Payout Ratio TTM Chart

MSFT Cash Div. Payout Ratio TTM data by YCharts

Winner: Microsoft, 3-2.

Wow, that one was back and forth until the very end, when Microsoft's superior free cash flow levels allowed it to trounce the high-payout McDonald's, which is at risk of a dividend reduction should it find itself struggling to grow. Does that make Microsoft the best investment today? Perhaps not -- shareholders have earned only a third of the return Mickey D's shareholders have enjoyed in the past five years. What do you think? Is Microsoft the better investment today, or does McDonald's offer some non-dividend advantages that make it a superior overall stock for your portfolio?

It's been a frustrating path for Microsoft investors, who've watched the company fail to capitalize on the incredible growth in mobile over the past decade. However, with the release of its own tablet, along with the widely anticipated Windows 8 operating system, the company is looking to make a splash in this booming market. In a new premium report on Microsoft, a Motley Fool analyst explains that while the opportunity is huge, so are the challenges. The report includes regular updates as key events occur, so make sure to claim a copy of this report now by clicking here.

The article Microsoft vs. McDonald's: Which Dow Stock's Dividend Dominates? originally appeared on Fool.com.

Fool contributor Alex Planes holds no financial position in any company mentioned here. Add him on Google+ or follow him on Twitter, @TMFBiggles, for more insight into markets, history, and technology. The Motley Fool recommends and owns shares of McDonald's and Walt Disney. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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