The 10 Best Dividend Stocks in Tech

Each of these technology giants pays a safe, supportable dividend

Cisco stock can lever fundamentals to overcome the trade war

Source: Prayitno via Flickr (Modified)

A handful of high-quality technology companies are flush with cash and paying safe, growing dividends.

The 10 Best Dividend Stocks in Tech
Source: Flickr

While tech is not regarded as one of the best stock sectors for dividends, a number of dominant, well-established cash cows in the space are extremely reliable dividend payers.

The 10 technology companies identified here sport an average dividend yield of 3.1% and have enduring competitive advantages.

These are the best dividend stocks in tech to consider for our Top 20 Dividend Stocks portfolio.

Best Dividend Stocks: International Business Machines Corp. (IBM)

Best Dividend Stocks: International Business Machines (IBM)Yield: 3.8%

International Business Machines Corp. (IBM) is one of Warren Buffett’s top dividend stocks, and for good reason.

Despite the company’s struggles to grow revenue the last few years, IBM seems poised to remain a critical player across the technology landscape.

The company has been in business for more than 100 years and provides IT infrastructure services, consulting, software, and server and storage hardware.

IBM’s powerful mainframe computers are relied on by most of the largest banks, insurers, retailers and other companies to handle intensive, mission-critical tasks every second of the day.

As a matter of fact, roughly half of all Fortune 100 companies outsource their IT operations to IBM.

With so many existing customer relationships and legacy systems in place, IBM should generate a reliable stream of free cash flow for many years to come.

IBM has admittedly been slow to respond to intense competition and evolving technology trends such as the cloud, but the company certainly has the resources needed to evolve.

Looking at the dividend, IBM has one of the safest payments in the market. The company’s earnings payout ratio over the last 12 months is a healthy 40%, and IBM maintains nearly $15 billion of cash on hand compared to total dividend payments last fiscal year of just $4.3 billion.

Despite its relatively high dividend yield, IBM has rewarded shareholders with healthy dividend growth.

The company most recently increased its dividend by 7.7% earlier this year, and IBM has compounded its dividend by 20.4% per year over its last 10 fiscal years. Annual dividend payments increased from 78 cents per share in 2005 to $5 in 2015 and have increased each year since 1996.

IBM’s stock trades at 10.5 times forward earnings estimates and offers a dividend yield of 3.8%, which is significantly higher than its five-year average dividend yield of 2.3%.

Best Dividend Stocks: Intel Corporation (INTC)

Best Dividend Stocks: Intel Corporation (INTC)Yield: 3.5%

Intel Corporation (INTC) has dominated the semiconductor chip industry for nearly 50 years. The company’s main focus has been on microprocessors, which act as the brain of computers, servers, wearable devices and other electronics.

Approximately half of Intel’s operating profits are derived from personal computer (PC) chips with the rest coming from data center processors, flash memory chips and a mix of other chips.

Intel’s microprocessors are used in more than 80% of global computers sold each year, and it controls almost 100% of the market for servers built on PC chips.

The company’s dominant market position is the result of its multibillion-dollar investments in advanced manufacturing processes, economies of scale, reputation for quality and incumbent system architecture (many legacy applications run on Intel’s technology, creating switching costs).

Thanks to its competitive advantages and conservative management team, the company’s dividend is very safe. Intel’s payout ratio has remained near 40% over the last year, and the company has generated healthy free cash flow in each of the last 10 years. In 2015 alone, Intel generated over $2.50 in free cash flow for every dollar of dividends it paid.

The company’s balance sheet also looks great, with $15 billion in cash compared to total debt of $25.4 billion and dividend payments of $4.6 billion last fiscal year.

Intel’s dividend growth has also been very dependable. The company has paid uninterrupted dividends since the early 1990s and increased it all but one year since 2004.

Intel last raised its dividend by 8% in early 2016 and has grown its dividend by 11.6% per year over its last 10 fiscal years. Mid- to high-single-digit growth seems likely to continue.

The company’s shares trade at 11.4 times forward earnings estimates and offers a dividend yield of 3.5%, which is slightly higher than its five-year average dividend yield of 3.2%.

Best Dividend Stocks: Cisco Systems, Inc. (CSCO)

Best Dividend Stocks: Cisco Systems, Inc. (CSCO)Yield: 3.9%

Cisco Systems, Inc. (CSCO) has been in business since 1984 and sells a wide variety of technology hardware and services that primarily connect computing devices to networks or computer networks with each other.

Switches and routers are the company’s biggest product categories and accounted for 39% and 20%, respectively, of Cisco’s product sales.

Cisco dominates both of its core markets. According to IDC, Cisco’s market share in the Ethernet switching market was 59.2% at the end of the third quarter of 2015. The company’s share in routers is also in excess of 50%.

Cisco benefits from being able to offer customers a much larger suite of networking products and services than its rivals, which allows businesses to deal with fewer vendors and enjoy a lower total cost of ownership.

The company has also invested over $18 billion in research and development over the past three years to continue enhancing its technology portfolio. By providing cost-effective, integrated solutions to customers and maintaining a reputation for quality, Cisco will remain a critical technology company for many years to come.

Cisco has paid dividends since 2011 and most raised its dividend by 24% earlier this year. With a dividend payout ratio near 40% and nearly $40 billion in excess cash on the balance sheet, Cisco has plenty of room to continue growing its dividend at a fast pace.

Cisco’s shares trade at 11.2 times forward earnings estimates and offers a dividend yield of 3.9%. The company offers a powerful blend of dividend yield and growth.

Best Dividend Stocks: Qualcomm, Inc. (QCOM)

Best Dividend Stocks: Qualcomm, Inc. (QCOM)Yield: 4.1%

Qualcomm, Inc. (QCOM) primarily makes money by designing semiconductor chips that go into smartphones and tablets.

The company completely dominates its market and makes most of its profits from licensing its intellectual property to smartphone manufacturers.

Qualcomm owns a number of patents for solutions that are mission critical for smartphones to function across various network standards such as 4G and LTE. The company makes money every time a smartphone is sold, resulting in substantial cash flows.

Qualcomm has increased its dividend every year since it started making payouts in 2003. The company is a member of the Dividend Achievers List and has plenty of ability to continue raising its payout.

The company increased its dividend by 10% earlier this year and has grown its dividend by 18.5% per year over its last 10 fiscal years.

With a payout ratio of 61% and more than $16 billion in cash on hand, Qualcomm has the ability to continue rewarding shareholders with healthy dividend increases.

Shares of Qualcomm trade at 11.2 times forward earnings estimates and offer a dividend yield of 4.1%.

Best Dividend Stocks: Texas Instruments Incorporated (TXN)

Best Dividend Stocks: Texas Instruments Incorporated (TXN)Yield: 2.7%

Texas Instruments Incorporated (TXN) sells analog and embedded semiconductor chips to more than 100,000 customers across a wide range of industries.

The company has been in business for more than 85 years and focuses on selling products characterized by long product cycles and advanced manufacturing technologies.

As the largest analog semiconductor manufacturer in the world, Texas Instruments enjoys meaningful cost advantages and can afford to invest more than $1 billion in research and development each year to develop new products.

The company owns more than 40,000 patents and solves some of the world’s most challenging technological problems, helping it maintain operating margins in excess of 30%.

Texas Instruments’ management team is committed to returning 100% of free cash flow to shareholders through dividends and share repurchases.

The company has increased its dividend for 12 consecutive years and is an example of a blue chip dividend stock. Dividend growth has come in at 25.9% per year over the last decade, but Texas Instruments’ last increase was a more moderate 12% in late 2015.

With a payout ratio near 50%, excellent free cash flow generation and a strong balance sheet, strong dividend growth should continue.

TXN’s stock trades at 17.6 times forward earnings estimates and has a dividend yield of 2.7%, which is somewhat higher than its five-year average dividend yield of 2.3%.

Best Dividend Stocks: Oracle Corporation (ORCL)

Best Dividend Stocks: Oracle Corporation (ORCL)Yield: 1.5%

Oracle Corporation (ORCL) and SAP SE (ADR) (SAP) dominate the global enterprise software market. ORCL provides database and middleware software, application software, cloud infrastructure software and hardware systems to hundreds of thousands of businesses.

The company benefits from having one of the most valuable brands in the world and generates extremely consistent cash flow because of the mission-critical nature of its solutions.

Oracle’s products are well integrated and save companies time and money, making it costly and typically impractical for them to switch to other vendors. As a result, Oracle enjoys a large and growing base of recurring revenue.

While the company’s market is undergoing a meaningful shift from selling software onsite to delivering over the cloud, it has the resources to offer customers both options.

Oracle has paid dividends since 2009 and increased its payout by 24.6% per year over its last five fiscal years. Its last dividend increase was a 25% boost in early 2015, and the company has plenty of potential for future large increases.

Oracle’s free cash flow payout ratio sits below 20%, and the company has over $50 billion in cash on hand. There is plenty of room to return more cash to shareholders.

Oracle’s shares trade at 14.1 times forward earnings estimates and offers a dividend yield of 1.5%, which is somewhat higher than its five-year average dividend yield of 1%.

Best Dividend Stocks: Linear Technology Corporation (LLTC)

Best Dividend Stocks: Linear Technology Corporation (LLTC)Yield: 2.9%

Linear Technology Corporation (LLTC) was founded in 1981 and manufactures a wide variety of analog semiconductor chips.

Linear’s chips are used in practically every electronic device to monitor, amplify, condition, regulate, or transform signals found in the real world such as temperature, pressure, light, sound and weight.

The company’s products are used in everything from automobiles to medical devices and industrial instrumentation.

Despite being a technology company, its business model has proven to be extremely durable and generates extremely reliable cash flow.

This is because Linear’s analog chips are focused on products characterized by long life cycles and complex designs, helping create an environment characterized by high margins and stable pricing.

Linear has been one of the most reliable dividend growth stocks and will join the Dividend Aristocrats List by 2019. The company has increased its dividend by 11.6% per year over its last 10 fiscal years and last raised its payout by 7% in early 2016. With a free cash flow payout ratio near 50%, there is plenty of room for Linear to continue increasing its dividend at a mid-single-digit clip.

Linear’s shares trade at 20.4 times forward earnings estimates and offer a dividend yield of 2.9%, which is somewhat higher than its five-year average dividend yield of 2.7%.

Best Dividend Stocks: CA, Inc. (CA)

Best Dividend Stocks: CA, Inc. (CA)Yield: 3.2%

CA, Inc. (CA) has been a public company for 35 years and provides software solutions that enable businesses to maintain enterprise and mainframe platforms used to power a wide array of computing needs.

CA counts 47 of the Fortune 50 companies as customers, and it is the number one or two player in 11 mainframe software markets. Many major companies could not operate without the use of CA’s software, making the company a critical vendor.

The business has also been a reliable dividend payer because its fundamentals are very predictable. Historically, more than 75% of CA’s annual revenue is predetermined because its business model is based on recurring software sales.

The company’s dividend payment is very safe. CA maintains a healthy earnings payout ratio of 56%, and the business has more cash than debt.

Dividend growth hasn’t been great in recent years, as CA’s revenue has slightly contracted each year since fiscal year 2013. The company’s dividend was held flat since 2012 until it raised its payout by 2% earlier this year.

The company’s shares trade at 11.8 times forward earnings estimates and offer a dividend yield of 3.2%, which is higher than its five-year average dividend yield of 2.5%.

Best Dividend Stocks: Apple Inc. (AAPL)

Best Dividend Stocks: Apple Inc. (AAPL)Yield: 2.5%

Apple Inc. (AAPL) sells smartphones, tablets, computers and a variety of software, services and accessories.

iPhones have served as Apple’s biggest growth driver in recent years and accounted for about 66% of the company’s revenue last fiscal year. Macs generated another 11% of Apple’s sales, and iPads accounted for 10% of revenue. Software, services and sales of other hardware such as iPods contributed the remaining 13% of Apple’s sales.

Apple’s main advantage is that it possesses the most valuable brand in the world. Billions of people are familiar with the Apple brand and know that it represents quality.

While technologies and consumer preferences are constantly evolving, Apple’s reputation is stellar and makes it easier for the company to enter new markets. The company’s powerful ecosystem of hardware and software and its loyal group of followers will help it survive for many years to come.

Apple began paying dividends in 2012 and has since raised its quarterly payout from 38 cents per share to 57 cents, representing a cumulative increase of 50% over the last three years.

The company last raised its dividend by 8.8% earlier this year and has plenty of potential for strong dividend growth going forward.

Apple’s payout ratios are close to 20%, and it has plenty of cash that it can use to boost shareholder returns.

Apple’s stock trades at 10.2 times forward earnings estimates and offers a dividend yield of 2.5%.

Best Dividend Stocks: Microsoft Corporation (MSFT)

Best Dividend Stocks: Microsoft Corporation (MSFT)Yield: 2.8%

Microsoft Corporation (MSFT) is the biggest software company in the world and sells the Windows desktop operating system and its suite of Office software such as Microsoft Excel and PowerPoint.

Practically every business uses the company’s software ecosystem, and Microsoft is one of the most powerful brands in the world.

With the far majority of installed computers using Microsoft’s operating system and business software, the company has proven to be difficult to disrupt.

New software is primarily written to be compatible with Microsoft’s operating system because it touches the most end users, creating a self-reinforcing cycle for Microsoft to continue dominating the market.

As a result, Microsoft’s operating margin has remained in the mid-30% range for most of the last decade and the company has generated substantial free cash flow each year.

Microsoft has paid and increased dividends every year since 2003. The company’s dividend has increased by 17.3% per year over its last five fiscal years, and Microsoft’s last dividend increase was a 16% boost in late 2015.

Microsoft has plenty of flexibility to continue raising its dividend at a double-digit rate thanks to its healthy payout ratio near 40%, over $50 billion in excess cash and consistent free cash flow generation.

The company’s shares trade at 17.5 times forward earnings estimates and offer a dividend yield of 2.8%, which is somewhat higher than its five-year average dividend yield of 2.5%.

As of the time of this writing, Simply Safe Dividends was long INTC, LLTC and ORCL.


Article printed from InvestorPlace Media, https://investorplace.com/2016/05/the-best-dividend-stocks-in-tech/.

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