Five Dividend Plays in the Tech Sector
Andrés is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Technology stocks used to avoid dividend payments due to the cyclicality of the business and high reinvestment needs, but things have changed a lot over the last few years. Many big companies have proven that they can keep delivering strong cash-flows through the economic cycle, and they have accumulated more liquidity than they need to reinvest. Here I'll list five attractive dividend plays for tech investors.
There was a very heated discussion among Apple (NASDAQ: AAPL) investors for a long time on the subject of dividend payments. Fortunately, Tim Cook finally decided to put some of the company's enormous cash hoard to a better use than earning almost zero percent in the banks, and the Cupertino giant implemented a modest dividend payment.
At $2.65 per share, Apple doesn't look very exciting in terms of dividend yield – around 1.6% at current price levels – but the potential for growth in this dividend is certainly much more interesting. Apple is paying less than a quarter of last year’s earnings in dividends, and those earnings will continue growing in the future.
Besides, the company is holding more than $100 billion in cash and liquid investments, and it produced more than $40 billion in free cash flows over the last twelve months. Keeping in mind that the current dividend costs less than 10 billion per year, there is a lot of room for increasing payments over the following years. Apple's dividend is certainly not the biggest one in the industry, but it does a have one of the most attractive growth prospects.
Among dividend growth stocks in the tech industry, IBM (NYSE: IBM) deserves a privileged spot due to its trajectory. The company is a pioneer among tech stocks when it comes to regular dividends increases: it has accumulated 16 consecutive years of growing dividends, and last year it raised payments by more than 15%. Just like Apple, IBM pays a modest dividend yield of 1.6%, but it also has a lot of upside considering that the payout ratio is a very conservative 22%.
Investors looking for bigger yields could consider contrarian bets like Microsoft (NASDAQ: MSFT) and Intel (NASDAQ: INTC). The two companies suffer from the same problem: they still haven't figured out how to successfully enter the mobile revolution, so they are lagging other competitors when it comes to one of the hottest growth trends in the tech business.
Investors in both Microsoft and Intel are eagerly hoping for a successful launch of Windows 8, which should reinvigorate sales for both companies and maybe recover some of the lost optimism regarding growth opportunities. It should be noted that both stocks are paying very juicy dividend yields, in the area of 4% for Intel and 3% for Microsoft, although earnings growth has been slowing at these tech titans, they still have comfortable payout ratios of 34% and 40% of earnings for Intel and Microsoft respectively.
Another tech bellwether, which is not growing as fast as it used to but is now paying a big and healthy dividend yield, is Cisco (NASDAQ: CSCO). The networking giant yields almost 3% in dividends, and those payments are very sustainable since Cisco has a payout ratio below 19%. The company has been facing increased competition from low cost Asian players like Huawei and ZTE, but Cisco still holds the quality leader position in most of the markets in which it operates.
Cisco is restructuring its businesses to dispose of low margin segments and stick with the most attractive ones. This could mean some increased expenses in the middle term, but should be positive for margins on a long term timeframe. Internet traffic and connectivity needs are an interesting sector which should produce robust demand over the following years, and Cisco should be able to translate that into big cash flows – and dividends – to shareholders.
Innovation and growth opportunities have always been an important reason to invest in technology stocks. In some particular cases, attractive dividends are becoming an extra reason to do so.
acardenal owns shares of Apple and IBM. The Motley Fool owns shares of Apple, International Business Machines, Intel, and Microsoft. Motley Fool newsletter services recommend Apple and Intel. 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.