Three Technology Stocks with Solid Dividend Prospects
Andrés is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The tech sector has not been traditionally considered a fertile ground for dividend stocks -- most tech companies used to avoid dividend payments due to the high growth nature of the industry and the needs for capital reinvestments. But things have been changing, and many big tech companies have developed very stable businesses that provide more than enough cash flows, so they can at the same time finance the company's capital requirements and reward shareholders with growing dividends.
Technology companies are well known for avoiding leverage. In fact, many of them operate with a net cash position: more cash and liquid investments than debt. This means some tech firms are exceptionally well positioned to produce outstanding dividend growth due to the powerful combination on growing cash flows and a strong financial position.
Microsoft (NASDAQ: MSFT) is no longer the high growth company it was decades ago, but as the business matured the company has gained in stability and financial strength. Microsoft is a cash machine that is generating more than $25 billion annually in free cash flows and also has a net cash position in its balance sheet. The company has missed many important opportunities coming from new trends in technology during in the last years, and the shift toward mobile computing is surely a challenge for Microsoft.
On the other hand, there are areas in which Microsoft has found new possibilities and is investing heavily to make sure it won't be left behind again. Microsoft still has a very strong presence in the corporate sector, and its business division and servers and tools operations look quite promising in terms of growth prospects. The company is well positioned to capitalize on opportunities from cloud computing in the middle term with its Windows Azure platform.
With a dividend yield of 2.5% and a payout ratio of 29%, investors will probably receive increased payments in the future. Microsoft provides a relatively new dividend, with only 7 consecutive years of increases, but the company announced a very juicy 25% raise in dividend in the third quarter of 2011, which supports the idea of Microsoft as a dividend growth stock.
Another company benefiting from a strong presence in the corporate sector and with exciting prospects for dividend growth in the middle term is Accenture (NYSE: ACN). This global consulting firm started paying dividends in 2005, and dividends have increased at a 25% annually since them. Accenture currently delivers a 2.3% dividend yield.
With more than $4.8 billion in cash and equivalents in its balance sheet, versus nearly $1 billion in short and long term debt, Accenture's financial position is no reason for concern. The payout ratio is 30% of net income, so there is still some very interesting upside room in Accenture's dividends.
Intel (NASDAQ: INTC) is the largest semiconductor company in the world, which gives it an important advantage when it comes to production scale and resources for research and development. On the other hand, the mobile computing revolution has brought a very strong competitor in ARM (NASDAQ: ARMH), which has captured most of the opportunities coming from smartphones and tablets.
Although Intel has been able to provide higher processor performance with its products, ARM is still ahead when it comes to energy consumption, which is a vital characteristic in mobile. But even if Intel is never able to gain much participation in tablets, the trend toward cloud computing will require substantial server build-outs to create the infrastructure necessary for the cloud, so it should provide a nice tailwind for the company's server processor equipment.
With $10.2 billion in cash and equivalents and only $7.3 billion in debt, Intel is in an excellent financial shape, and its dividend yield of 3.2% is quite noteworthy for the tech sector. Furthermore, dividends currently consume only 34% of net income, another factor that makes Intel a solid alternative for those investors looking for dividend plays in the tech sector.
The technology sector has changed over the last years, and dividend investors should pay attention to the new opportunities emerging in this area. Many of the best renowned dividend stocks of the future are probably coming from the technology business.
acardenal has no positions in the stocks mentioned above. The Motley Fool owns shares of Intel and Microsoft. Motley Fool newsletter services recommend Accenture Ltd., Intel, and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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. If you have questions about this post or the Fool’s blog network, click here for information.