Decent Dividends in the Software Services Sector

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

I'm getting into looking at software services companies and I'm really thinking about what makes them good or bad. And while the traits that make a company good or bad are unique to the industry and even to individual companies, I will always love dividends (provided the company can actually afford to pay them) as one indicator of quality. So let's check out a few companies in the business software industry and see how well they're doing with their dividends.

Covered But Far From Buried

Iron Mountain (NYSE: IRM) is a curiously hungry company that carries a "make sales or no longer do business" way of thinking that I seriously appreciate. They grew by leaps and bounds through the '80s, '90s and the early part of the century and I like how they've taken on very adaptive methods. Originally the company started as an attempt to grow mushrooms in a depleted iron mine, and when that failed they started storing information. I love companies with character. While most of the company's storage locations are leased warehouse spaces that give a lot of cash flow flexibility, I like the fact that several of its storage options really are in underground bunkers. With this level of safety, I'm okay with a rather paltry 6% dividend and I think Iron Mountain's 3.4% dividend yield is, uh, well protected.

I'm Seriously Considering This One

Automatic Data Processing (NASDAQ: ADP) is a pretty solid company, in my opinion. And solid companies have a tendency to pay solid dividends. At a $27.95 billion market cap and carrying 12.9% dividends that it earns through keeping heavy equipment and vehicle dealers going and being a company that other companies outsource to, I like ADP's stability. Moody's and S&P don't just hand out AAA credit scores, after all. So yes, I will go out on a limb you could probably build a 3-bedroom house on and say that I trust that ADP's 3% dividend will most likely continue for awhile unabated. I just wish the company were trading at a lower price -- but one does pay a price for quality and I totally missed out on Google because I'm a cheapskate.

Solid Living Through... Not Making a Profit?

Blackbaud (NASDAQ: BLKB) is an example of when putting a lot of one's eggs in one basket may not be the best idea. While Blackbaud does have a lot of different products under its banner, The Raiser's Edge is its flagship. Just looking at Blackbaud is giving me horrible flashbacks to Blackboard, which grew well despite being a hot mess in the early part of the century and giving fuel to my Crappy Tech Rule, which says that tech companies that don't work well tend to grow well.

My biggest issue with Blackbaud is also my biggest appreciation of it. While a not-for-profit organization is technically never supposed to be in it "for the money," if you've ever worked for or encountered such an enterprise you know that they are literally all about the latest sales pitch. Say what you will about the Wal-Marts and the Exxons of the world, at least they occasionally stop selling for a moment to focus on something else. The fact that Blackbaud is a significant player in keeping not-for-profit companies on the sale trail and getting the money they need to do their good works says that this is a company with a powerful niche. The better it works this niche, the better it will do.

But I'd caution you about Blackbaud's 2.1% dividend. First, it's operating under a 108.91 P/E ratio, which screams at me to stop and think very carefully before going any further. Secondly, I just find it strange that a company could make money by helping companies that aren't out to make money. That might just be my lack of sense showing, though.

Working With the Best is a Good Foundation

Amdocs Limited (NYSE: DOX) normally wouldn't excite me that much because it only pays a 1.5% dividend. Usually I like at the very least twice would I get from my savings account if I'm taking on a risk asset like an individual stock. But there are three reasons I respect this company more than most:

1. It's trading for low multiples, namely a 14.85 P/E and 1.8 times its book value.

2. The company works in more than 50 countries and with some of the largest telecom providers in the world. That's pretty solid overall.

3. Amdocs produces a reasonable 12.1% profit margin. With that in place you've got a solid base for a dividend.

Overall, I like Amdocs even if its dividend is a tad mediocre for my tastes. I guess that's what successful investing is -- letting durable mediocrity stroll you toward lasting wealth.

Honk if You Love Dividends

I have to constantly work to temper my love for double-digit dividends because they rarely last. If you have a similar problem settling for "mediocre" returns, the above are some ideas that can help you keep your feet on the ground. There's nothing wrong with 3% -- at least it'll keep up with inflation. If I missed any important details about this little money machines, do let me know.

pongun has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Automatic Data Processing and Blackbaud. 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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