If you’re looking for dividend growth, stop looking at traditional dividend sectors. Consumer staples? Nope. Utilities? Ha! If you want real dividend growth, look at semiconductors, software and cloud computing.
That’s right: Tech stocks are the real kings of dividend growth.
As they’ve matured, former highfliers in the tech space have become serious about rewarding shareholders through dividends. And they can. Because many tech firms simply print cash. Mix that with low fixed costs and capital expenditures, and you have a recipe for huge cash balances.
They have to do something with it, and that something is sending it your way.
According to S&P Dow Jones Indices, the tech sector contributed about 5.6% of the S&P 500’s dividends about 10 years ago. Today, that number is closer to 15%. That’s not because dividends shrank elsewhere — it’s because tech stocks’ dividends grew like weeds. The average yield on tech stocks now sits at more than 2%, which outpaces the S&P 500.
The following seven tech stocks are right up that alley. Each has produced double-digit dividend growth over the past five years, and each has the cash to keep the good times rolling. Here’s a look at each, in order of their dividend growth.
Must-Own Tech Stocks With Real Dividend Growth: Microsoft (MSFT)
MSFT Dividend Yield: 2.5%
5-Year Dividend Growth Rate: 12.45%
It’s easy to write off Microsoft Corporation (NASDAQ:MSFT) as a tech-era dinosaur. But Bill Gates hasn’t remained one of the world’s richest people by owning 4% of a plodding dinosaur.
Mr. Softy is as spry as ever.
Sure, Microsoft still dominates with the PC’s core operating system and software. But it’s also back to innovating under CEO Satya Nadella. Nadella has cut the fat from MSFT and plowed back into its core Office business. From offering cloud-based solutions to revamping its office software unit, Nadella understands that Microsoft equals business.
Meanwhile, Nadella has bet big on data with its buyout of LinkedIn Corporation (NYSE:LNKD). LinkedIn doesn’t just give Microsoft and entry into social — it gives the company a huge amount of insight into the business world, as it data-mines that huge user base. That gives MSFT a huge amount of insight into the business world as it data mines that huge 450 million user base.
Meanwhile, Microsoft is a cash juggernaut with a reasonable payout ratio of about 65%. MSFT has grown its dividend by 350% since it started paying out a regular dividend in 2004, and while that growth might not be as robust as it once was, it’ll still be better than you get from many staples and utility companies.
Must-Own Tech Stocks With Real Dividend Growth: Texas Instruments (TXN)
TXN Dividend Yield: 2.2%
5-Year Dividend Growth Rate: 17.5%
When it comes to tech stocks that pay dividends, Texas Instruments Incorporated (NASDAQ:TXN) is no slouch.
TXN is a semiconductor stalwart that produces analog chips — the basic, boring semiconductors found in every electronic device, from computers to washing machines. This is more of a commodity business than anything else, but it has rewarded Texas Instruments in full. Steady cash flows have formed the base for a modest dividend.
Higher-margin chips, however, are fueling growth.
Texas Instruments is pushing into chips for things like communication, touchscreens, connectivity, renewable energy and other high-tech applications. Those products are why TXN is up 180% in the past five years, which outdoes the Nasdaq by nearly 70 percentage points. It’s also why TI’s dividend has grown so robustly of late.
TXN only recently became serious about its dividend growth. As of 2015’s end, TI boasted 12 straight years of dividend growth. Within the next few months, Texas Instruments should qualify for year No. 13.
Must-Own Tech Stocks With Real Dividend Growth: Qualcomm, Inc. (QCOM)
QCOM Dividend Yield: 3.4%
5-Year Dividend Growth Rate: 19.2%
You know how else you become a major dividend player in the world of tech stocks? Be the dominant force in your industry.
In terms of smartphones, that means one stock: Qualcomm, Inc. (NASDAQ:QCOM).
QCOM makes all sorts of semiconductor chips that power all sorts of wireless devices. It also mints profits from licensing its intellectual property to smartphone manufacturers and other chipmakers.
A recent surge of competition has sparked fears that Qualcomm will lose pricing power and market share. However, QCOM still owns some of the patents needed for these other firms to use their products on new 4G/LTE networks.
QCOM boasts a boatload of cash and phenomenal flows, such as last year’s roughly $4.5 billion in FCF. Its payout ratio of 57% is plenty comfortable. So Qualcomm can keep pushing payouts higher without putting the business in danger.
Must-Own Tech Stocks With Real Dividend Growth: Oracle Corporation (ORCL)
ORCL Dividend Yield: 1.5%
5-Year Dividend Growth Rate: 20.1%
There’s nothing exciting about a 1.5% yield. You can get that from a Treasury bond.
But Treasury bonds’ payouts sure aren’t growing — and Oracle Corporation’s (NYSE:ORCL) payouts sure are.
ORCL has grown its payout by more than 150% in just the past five years. Driving that dividend growth has been Oracle’s continued dominance of the enterprise software market. The House That Larry Ellison Built is expanding its cloud offerings and is nudging customers toward usage-based platform-as-a-service (PaaS) contracts and new subscription agreements. This will create a reliable, constant flow of cash into Oracle’s coffers.
And with ORCL planning to fully transition to the cloud, the idea is that these offering will provide higher margins, driving profits higher in the future.
Meanwhile, Oracle is expanding into new markets, including fleet management and healthcare.
ORCL still pays out less than 30% of its profits in dividends. As long as the cash keeps flowing, Oracle’s payout will just keep growing.
Must-Own Tech Stocks With Real Dividend Growth: Cisco Systems (CSCO)
CSCO Dividend Yield: 3.3%
5-Year Dividend Growth Rate: 34.0%
When you hear the name Cisco Systems, Inc. (NASDAQ:CSCO), images of the dot-com boom-and-bust come to mind. Which is fair — Cisco was one of the internet’s rising starts back in the late 90s, and just like most other tech companies, it came crashing back to earth in 2000-01.
Since then, CSCO has become a more stable grower that has instituted a healthy and growing dividend. It’s not dividend royalty yet, but it’s certainly on the path to a crown.
Sure, Cisco’s network equipment business is still there and still churning out cash flows. But CSCO is squeezing out growth in the services space. These higher-margined businesses and expansions into things like cybersecurity, the “Internet of Things” and even energy solutions have driven Cisco to a doubling of its share price in the past five years, and a more-than-quadrupling of its dividend over the same period.
Cisco has more than $65 billion in cash and short-term investments, and it produced more than $12 billion in free cash flows last year. It’s paying out less than half of its profits as dividends. Meanwhile, profit forecasts see mid-single-digit growth for the next few years.
Significant dividend growth is all but guaranteed.
Must-Own Tech Stocks With Real Dividend Growth: CA, Inc. (CA)
CA Dividend Yield: 3.0%
5-Year Dividend Growth Rate: 38.5%
Cloud computing, wireless networking, e-commerce — you name the big tech trend, and big mainframe and server computers are doing the work.
That’s good news for companies like CA, Inc. (NASDAQ:CA), which focuses on systems software. Essentially, that’s the “guts” of a mainframe. Without it, distributed computing, mobile, virtual machines, cloud computing, etc. … that all doesn’t work. CA basically sells all the software and products that other businesses and organizations need to conduct business.
That critical leadership position has become even more vital as CA has expanded into new enterprise applications that run together with its mainframe software. That all-in-one packaging allows CA to make big revenues from the initial software sale, plus recurring revenues from the application subscriptions.
In turn, CA is able to offer a healthy 3% dividend yield on a payout that dates back to 1990 — well before most tech stocks became dividend stocks. More importantly, CA has ramped up its dividend growth as these new SaaS businesses have kicked in.
CA is the last of our individual picks. However, you can flip to the last page if you’re interested in an exchange-traded fund for dividend-growth and tech exposure.
Must-Own Tech Stocks With Real Dividend Growth: First Trust NASDAQ Technology Dividend Index Fund (TDIV)
TDIV Dividend Yield: 2.7%
3-Year Dividend Growth Rate: 13.1%*
Given how many tech stocks have become dividend stalwarts, maybe the best strategy is own a bunch of them.
The First Trust NASDAQ Technology Dividend Index Fund (NASDAQ:TDIV) allow investors to do just that.
TDIV hopes to tap into the powerful dividend growth across the tech sector. The ETF tracks an index that screens for tech stocks that have paid a regular or common dividend within the past 12 months, and haven’t cut the payout either. That screen lets in a lot of tech-focused dividend champions. In all, TDIV invests in 90 different stocks, including all the dividend payers on this list.
TDIV’s yield is “just” 2.7% currently, but the payout has grown in its first few years of existence. That’s largely a reflection of the growing trend toward thick dividends in the tech sector.
Expenses for TDIV are just 0.5%, or $50 per year on every $10,000 invested. It’s not the cheapest fund out there, but it’s also not prohibitively expensive, either.
*Because of TDIV’s distributions, and inception in 2012, we calculated a three-year dividend growth rate using 2013 distributions, 2016’s distributions to date and estimated distributions.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.