by Marc Bastow | October 1, 2012 12:45 pm
Tech stocks famously have been known as a place where every last dollar is hoarded to plow earnings back into research and development — and thus, the last place to look for steady, increasing dividends.
But the world — and indeed the technology world — has changed.
The go-go days of the 1990s — when Cisco (NASDAQ:CSCO), Intel (NASDAQ:INTC) and Microsoft (NASDAQ:MSFT) roamed the landscape, punching out new product launches seemingly every few years — are long gone.
Sure, every once in a while, some of these companies will take a bold new-product gamble — for example, Microsoft is unleashing its Surface tablet in an attempt to grab at some of the Apple (NASDAQ:AAPL) iPad’s lucrative market share. But short of something truly groundbreaking, none of these companies are set up to realize breakneck growth again.
So the growth ramp has slowed, but these companies still have successful businesses. It’s just that much of their cash now is being allocated elsewhere — specifically, our pockets.
Investors: Take advantage. A long-term portfolio should be rife with dividend stocks, and the tech sector should be represented — at least through companies with a little staying power. My suggestion? The aforementioned three: Cisco, Microsoft and Intel.
Here’s why: Despite some negative chatter, all three are well-capitalized, well-run and in outstanding financial and product shape. More importantly, two have improved their dividends on a consistent basis for years — with Cisco a relative newcomer, but clearly serious about rewarding shareholders.
For investors, that could mean huge chunks of income down the road. Let’s look at what these stocks’ payouts would be in just three years, even if dividend growth is capped at 15% per year:
|Yield||most Recent Increase||2015 est. dividend||2015 est. yield*||Income/
|CSCO||14 cents||2.9%||75%||21.25 cents||4.4%||$106.25|
|INTC||22 cents||3.9%||7.2%||33.25 cents||5.8%||$166.25|
|MSFT||23 cents||3.1%||15%||35 cents||4.7%||$175.00|
|* at current prices ** based on ownership of 500 shares|
That means if you’re capable of socking away 500 shares of each, that’s $450 per month in income in the next three years. Let’s take a quick look at each one:
Cisco: Cisco’s recent 75% increase was just a bit of an anomaly, and maybe just a way to catch up after anemic rises over the years, but it’s expected the company will now smooth out dividend increases over the long haul. For the near-term, Morgan Stanley (NYSE:MS) raised its estimates for Cisco through 2014, citing increased domestic product demand in its channels.
Intel: Its most recent dividend increase was below its average, though a recent Seeking Alpha analysis suggests stronger increases over the next 10-year period. While the declining PC business doesn’t bode well for Intel, InvestorPlace Editor Jeff Reeves highlights several reasons to consider the stock a long-term buy — most convincing to me are its enormous scale, and its attractiveness at current valuations. And Intel, in hopes of doing some damage in the mobile realm, has a new chip for tablets running Windows 8 — named “Atom” — offering power at a low cost.
Microsoft: Mr. Softy still has the most room to run with a cash hoard of over $64 billion, and its recent 15% increase might be topped later if the stock remains in the $30 range it has been tracking for what seems like an eternity. Microsoft has bet a lot on its Surface tablet, and one day down the road, it will have to provide more to the market than Windows. But with a good cash situation, Microsoft can take risks while still throwing money at investors.
And remember: Another way to maximize your technology fund is to reinvest the dividends into more shares instead of simply taking the cash. The power of the investment grows as you garner more shares, so if you don’t need the cash, don’t take it! As an example, investors who reinvested dividends in Microsoft since July 2010 would’ve seen a 33% return from that point despite a stock loss of about 3% over that time period.
Yes, this kind of portfolio costs money — stocks aren’t free. But MSFT, INTC and CSCO all trade at reasonable valuations (none trade at price-to-earnings ratios above 15), and again, you’re getting stocks around or above the 3% yield mark.
If you haven’t started a retirement portfolio yet, it’s never too late (or too soon) to start. These three technology stocks are a great place to begin.
Marc Bastow is an Assistant Editor at InvestorPlace.com. As of this writing, he was long MSFT and INTC.
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