by Alyssa Oursler | October 7, 2013 12:13 pm
Historically, the technology sector hasn’t been a common destination for income investors. That’s because tech stocks are generally associated with growth, and thus usually reinvest their hard-earned income to achieve just that.
In recent years, though, technology stocks in the S&P 500 have been increasing the chunk of earnings returned to shareholders at a faster clip than any other sector. As of the end the second quarter, total trailing payouts for tech stocks grew by a whopping 62% year-over-year — the third consecutive quarter it dwarfed all other sectors.
While the trend has been, in part, thanks to big-time increases from big-time tech stocks like Apple (AAPL), Microsoft (MSFT) and Cisco (CSCO), it extends beyond that. In fact, in Q2, more than 85% of dividend-paying technology stocks in the S&P 500 increased their payout by double-digit rates year-over-year.
For income investors, that means the technology sector should be on your radar when you go shopping for dividends. You can start with these four tech stocks:
Dividend Yield: 3%
Chip-maker Texas Instruments (TXN) has provided investors with the double bonus of strong share appreciation and a surefire dividend in recent years. During the past 12 months, TXN has soared more than 40% to hit 13-year highs … and even then, the tech stock’s quarterly 30-cent per share payout still yields more than 3%.
Texas Instruments has been paying dividends since 1962, and its annual payout has soared from less than 9 cents per share to more than a buck in the past decade alone. In fact, TXN already increased its dividend twice this year — by 33% and then another 7%. No wonder the company’s trailing dividend per share growth was the fifth-highest out of the entire S&P 500 at the end of Q2.
And TXN’s dividend still looks as sustainable as ever; the company’s total 2013 payout will cost it only half of its expected full-year earnings.
TI is well-positioned with products that cater to the growing mobile Internet trend, as well as an eye on wearable tech. Toss in expectations for 9% long-term earnings growth — including an estimate for 18% income improvement for 2013, followed by a 16% improvement for 2014 — and there’s plenty of reason to expect more of the same from TXN.
Dividend Yield: 3.4%
Another big climber and big yielder comes via hard drive maker Seagate Technology (STX), which has soared roughly 50% year-to-date.
It’s fair to point out that Seagate did stop paying its dividend during the 2008-09 downturn, and waited until 2011 to reinstate it. However, the refreshed dividend, at 18 cents quarterly, started out 50% better than its final 2008 payout, and since then it has ballooned to 38 cents per share.
Seagate actually took the No. 4 spot for trailing dividend growth at the end of Q2 — a bit surprising considering the company’s earnings moved in the other direction. STX has suffered sales and earnings weakness in the face of a declining PC market, and also has meager earnings growth slated long-term.
The tech stock’s dividend still looks solid enough, though. Its current 38-cent payout will tally a total of $1.52 per share for the full-year, which is less than 30% of expected earnings. And for the most recent fiscal year, which ended in July, Seagate’s total dividend used up only about a quarter of its free cash flow.
Meanwhile, CEO Steve Luczo remains confident in STX’s ability to adapt, saying on the most recent earnings call that Seagate will benefit from “data growth driven by cloud, mobile and open source advancement.”
Dividend Yield: 3.9%
Garmin (GRMN) is technically considered a consumer discretionary stock, according to the S&P 500 … but it makes consumer discretionary technology, and thus makes this list.
If you think the GPS-maker is doomed thanks to the rise of smartphones, think again. Garmin might not be the same hot name it was years ago, with sales still below 2009 levels, but GRMN still has deals with major automotive manufacturers in its back pocket, and also makes positioning products targeted at outdoorsmen.
On top of that, Garmin has been paying dividends for a decade, and GRMN was one of the top 10 S&P 500 stocks for compound annual dividend growth as of the end of Q2, for both a three-year and five-year time horizon.
GRMN currently pays out 45 cents per share each quarter — good for a yield of nearly 3.9%. And while the current annualized payout is around 75% of expected earnings for this fiscal year and next, free cash flow paints a much better picture. In 2012, for example, the company’s total dividends represented just less than half Garmin’s earnings and 40% of free cash flow.
Garmin did warn of a “particularly challenging” third quarter, though — numbers that will be reported Oct. 30. If things are indeed ugly and GRMN goes on discount, it could be a potential buy on the dips.
Dividend Yield: 3.9%
Last but not least, we had to go with one of the oldest names in the dividend tech stocks book: Intel (INTC). The chip-maker has increased its dividend tenfold during the past decade, with the current 23-cent quarterly payout yielding just under 4%.
Intel stock hasn’t been stellar — basically moving sideways since mid-2010 — but it’s still a good bet if you’re searching for steady income. Intel’s compound annual dividend growth during the past half-decade was 14% — the seventh-highest out of all S&P 500 stocks.
While Intel didn’t increase its dividend in the most recent quarter — making it likely that 2013 will be the second year since 2008 that INTC’s payout stayed put — Intel still has plenty of room to work with. INTC’s current dividend takes up less than half its projected full-year earnings.
Plus, the supposedly sluggish chip-maker is expected to post 11% annual earnings growth during the next five years. If that comes to pass, you can bet more of those profits will find their way into shareholders’ pockets.
As of this writing, Alyssa Oursler did not hold a position in any of the aforementioned securities.
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