4 Tech Stocks for your Dividend Growth Portfolio
Karin is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
If you've been paying any attention to the investing world lately, you surely know that dividend stocks have been an extremely popular choice for a couple of years now.
The reasons for this are fairly simple: 1) income investors have been faced with incredibly low yields on bonds and CDs, and have been forced to look to stocks for cash flow, and 2) research has shown that certain stocks that pay dividends have tended to do extremely well over the long run, by providing income and share price appreciation.
Technology stocks, for the most part, have not usually been associated with the overall dividend-paying category. They have traditionally been growth stocks, plowing profits back into further growth for the company in the form of research & development and acquisitions.
However, as the technology industry has grown and matured, there are now distinct categories within the sector. The newest, riskiest, start-ups still offer nothing in the way of dividends, but some of the older, more established and stable companies have really become attractive options for the income-seeking investor.
If you’ve read any of my articles, you know that I am a huge dividend fan. I’ve been writing about dividend-paying companies for about a year, I’ve designed a ratings system to help me select the best companies, and I’ve built my Perfect Dividend Portfolio (PDP), featuring ten stocks that I believe will perform better than other dividend portfolios.
I look for a combination of excellent dividend-raising history, high current yield, and superior potential for earnings growth. Earnings are important, and I take into account the projected five-year earnings growth rate as well as the current PE and the past twelve months’ share price increase.
For this article I sorted David Fish's excellent U.S Dividend Champions file, and pulled out the four technology companies that I believe represent the best opportunities today, in order of how they score on my ratings system. Two are companies that you probably know about, even in their newly-recognized dividend-paying status, but two you may not have considered yet.
Growth or Dividend Stock?
Microsoft (NASDAQ: MSFT) was the quintessential growth stock in its day. Early investors made a fortune. Now, it's a much mellower version of its younger self, and offers an excellent opportunity for income today.
The stock is currently trading at $33 per share and yields 2.8%. The company has raised its dividend every year for 10 years, which is the minimum I generally require to be considered for my portfolio; its 5-year Dividend Growth Rate (DGR) is an impressive15.9%, and its payout ratio is a conservative 34%, which leaves plenty of cash for further investments in the company as well as returning some to shareholders.
Microsoft has lost its cache in recent years to newer, hipper companies like Apple and Google, but don't count it out as dead just yet. The old man still has a few tricks up his sleeve.
Windows 8 may have gotten off to a rocky start, with user confusion and complaints, but users are quickly becoming used to the “app” interface, and Windows phones are gaining share rapidly, with a 52% increase year-over-year. Windows 8 is rapidly making the jump from desktop to mobile, and hopefully bringing with it Microsoft's chances for renewed interest from the masses.
Intel (NASDAQ: INTC) is another old tech company that has been overlooked recently in the clamor for “the new, the cool and the different,” but again, this company is far from dead.
Intel is currently trading at $23 and yields 4.0%; the company has been raising dividends consistently for 10 years, and has a 5-year DGR of 9.9%. Its 5-year projected earnings growth rate is 11.0%, and its PE is 12.2, and its payout ratio is 47%.
During the past year Intel's stock has been on a roller-coaster ride; $27 per share a year ago, as low as $19 in December, back up to $25 in June and now at $23.
Intel currently generates the 3rd highest yield among the Dow Jones 30 companies, and the company is about due for another increase (possibly on the order of 10%), which would likely jump the company into 2nd place.
The company's share price has suffered as the shift to mobile devices has resulted in the success of microchip competitors. But Intel's R&D department is funded nearly as well as Google's, and it's not going to let the mobile market pass it by.
Consider this an opportunity to get in on Intel's fantastic yield at a cheap price.
Texas Instruments (NASDAQ: TXN) is possibly not on your radar as a dividend stock, but it should be.
Texas Instruments is currently trading at $40 and yields 2.8%; the company has been raising dividends consistently for 10 years, and has a 5-year DGR of 22.9%. Its PE is 22.0, and its payout ratio is 47%. The share price is up 40% over the past twelve months.
Per the most recent earnings call on July 22nd, the company's current capital strategy is to “return all of our free cash flow to shareholders except for what we need to repay debt. In the second quarter, we reduced our debt level by $500 million. We also benefit from proceeds from employee stock option exercises that have allowed us to return more than 100% of our free cash flow to our shareholders while maintaining our targeted level of cash.”
With a projected earnings growth rate of 9% over the next 5 years, this bodes well for additional dividend increases and solid, reliable payments in the future.
Low Debt, Lots Of Cash
The final company is Maxim Integrated Products (NASDAQ: MXIM), which makes semiconductors.
Maxim is currently trading at $29 and yields 3.1%; the company has been raising dividends consistently for 12 years, and has a 5-year DGR of 9.5%. Its PE is 19.9, and its payout ratio is 51%. The share price is up 29% over the past twelve months.
The outstanding thing to notice about Maxim is its incredibly low level of debt; the debt/equity ratio is a low 0.2, and the company's total current assets figure actually exceeds the total debt load by 35%. With its most recent earnings report on July 25th, the company reported an 8% increase in the annual dividend and instituted a new $1.0 billion share repurchase program, both welcome news for investors.
I've prepared a chart showing how these four companies rate on my Perfect Dividend Portfolio scoring system. They would not be an automatic buy, but they certainly merit further scrutiny and consideration. Maybe they belong in your portfolio, too.
Karin Hernandez has no position in any stocks mentioned. The Motley Fool recommends Intel. The Motley Fool owns shares of 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!