Focus on Dividends

Chris is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

I almost hate that I've become rather boring when it comes to stocks.  In high school it was all micro cap, momentum chasing, technical analysis, and penny stocks.  Now, I'm focused on large cap companies that pay decent dividends and can be held for the long term.  I guess I'm getting old. 

Given the fears around the "fiscal cliff" we've seen most stocks take a thumping the past few weeks.  Dividend stocks have by far been hit the hardest though.  I feel this is primarily because one of the components to the January 1 changes is the 15% tax rate on qualified dividends.  I think this is a bit if a knee jerk reaction here. While it is possible that dividends will be taxed at ... wait for it ... your normal tax rate ... that at worst puts it on par with every other type of interest/dividend/annuity type return (excluding government / muni bonds).  Further, the yields on some of these names are at the high end of the spectrum and are made all the more attractive given the capital appreciation that can go along with any recovery in the economy. 

I could write this article and highlight the likes of Intel, Microsoft, and Cisco as good targets since the are A) Stable B) Sitting on truly massive amounts of cash meaning the dividend is only likely to go higher ... and if the 15% is set to expire, likely candidates for a special cash dividend C) All yielding above 3%.  Instead, I'd rather focus on some of the more unexpected names in tech.  

Garmin (NASDAQ: GRMN) is one that surprised me.  The Sat Nav company is currently yielding 4.66%.  I'm not an outdoorsman, so I was under the impression that aftermarket navigation devices were the only things they did (which my Android phone does just as well).  I was wrong.  Over the past 4 years Garmin has managed to diversify its product line across several industries (Automotive, Aviation, Maritime, Sports, Outdoors) bringing the heavyweight, Automotive, down from over 70% of revenue to 58%.  The company has managed to secure strong contracts with various automotive companies (Nissan, Dodge/Chrysler, Suzuki) to be the primary supplier of factory installed navigation and has secured contracts with Northrop Grumman for some of their helicopters and drones.  The company has recently raised its full year guidance(slightly) and has continued to have very strong free cash flow generation.  Lastly, and more importantly to my point, management has remained committed to returning that cash to shareholders through its dividend. 

The other company I want to highlight it Seagate Technologies (NASDAQ: STX).  I recall Seagate from my days of building PCs back in the early 2000s.  I think Seagate, Western Digital and Maxtor were the big 3 for PC drives, if my memory is correct.  Now we have Western Digital and Seagate.  Between the two, my money would be on Seagate.  They recently sold off part of their hard drive business to Samsung, which will improve overall profitability. This allows them to concentrate on their core focus for the future.  Of the data storage that it shipped in 2011, over 60% was for cloud storage.  If you're like me and believe this is where the future is headed (cloud storage, cloud applications etc), then Seagate is certainly poised to take advantage of that market. The company is also generating very strong free cash flow ($3.3B in 2012) and is committed to returning it to shareholders.  In 2012, they returned 85% of that cash to shareholders by way of dividends and share repurchases.  Aside from that, the 4.69% dividend is a nice bonus.   

Yields out there are low.  At best you'll get 1% from some of these on-line only banks like ING, AmEx, Ally.  I'm putting my money in high yielding companies to give me a better return for my hard earned money.       


 


CMartin26 has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Garmin. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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