2 Dividend Stocks You Can't Ignore

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

Weakness in debt markets has increased the attractiveness of dividend stocks. High-yield equities with a capital bonus can be ideal for investors seeking a steady stream of income. The primary risk is capital loss on the stock. Therefore, I recommend the following companies, which not only offer good dividend yield and low downside risk, but also major potential for capital appreciation.

Microsoft (NASDAQ: MSFT)

Microsoft is still one of the largest software companies and Windows is still the king of PC operating systems. The company has one of the largest buyback and dividend programs around, returning billions of dollars to investors. It recently refreshed its PC operating system with Windows 8 and has also launched an exciting new mobile platform, Windows Phone 8.

Windows 8 is Redmond’s first touch-centric operating system, and the company has high hopes. Microsoft recently introduced the Surface Pro tablet to showcase Windows 8, and although the initial reviews have been mixed, it has achieved most of its targets and stacks up well against traditional laptops. Success with Windows 8 and Surface could secure Microsoft’s future in an uncertain competitive climate, significantly boosting its shares.

The company offers a dividend yield of 3.8%, almost double the industry average. The payout ratio is 46%, slightly higher than the industry average. The software giant has approximately $70 billion in cash and generated $4.8 billion from operating activities last quarter. It generated $31 billion from operations last year, which equates to a total yield of 13.5%. The stock is trading at a P/E of 8.7x and has significant upside potential based on Windows 8's success. The strong buyback program is an assurance for investors of minimum downside risk.


Apple might seem a peculiar choice as a dividend stock, but I believe it is become an attractive play for dividends and even capital appreciation. The stock has depreciated from highs above $700 to a current trading range of $450 to $500. This depreciation is due to margin depression and lackluster product launches. Despite these problems, the company still has one of the strongest brand followings in the world, and it is highly unlikely people will stop buying Apple products anytime soon. The market expects growth of approximately 19% from Apple, and that demands higher valuations than the current forward P/E of 9x, especially given its huge market capitalization and cash reserves.

Apple might be looking towards its software dominance to drive future growth. The company has one of the largest smartphone footprints in the world, second only to Google’s (NASDAQ: GOOG) Android. Unlike Apple, Google doesn’t entirely control its own hardware, which makes it vulnerable to the whims of manufacturers such as Samsung and HTC. According to recent reports by Gartner, the Android brand is being overshadowed by the Samsung Galaxy brand, which translates into more power for the manufacturer. Apple and Google are both competing for domination of the future of smartphones and, just maybe, computing itself. Current trends indicate that the ecosystem might soon become the single most important decision factor for consumers purchasing computing and mobile devices. Apple has the most comprehensive, integrated ecosystem amongst rivals and also controls all its hardware. Therefore, it can benefit a great deal from growth in its software segment and, I believe, easily beat the 19% general growth estimate.

Apple offers its investors a dividend yield of 2.3% but has a payout ratio of only 11%, as compared to 29% for the industry overall. The recent growth slowdown and the large cash hoard of more than $100 billion make Apple the leading candidate for dividend growth, at least in the short term. There is a lot of investor pressure to increase the dividend, and I believe the company's management might comply sooner than expected.

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