Techno Stocks, The Future of Dividends?

 

 

For a long time in the stock market, dividend stocks were synonymous with diversified blue chips such as PG,JNJ, KO,PEP, CL, etc. These clue chips had long since put their period of high speed growth behind them and since been time to reward investors through increasing dividends. Investors select these kinds of stocks for the great mix of stability and quarterly cash flow. This is what you usually expect from mature companies in mature markets.

 

Similarly, we have seen techno companies rising in the 80’s and 90’s. They had demonstrated impressive growth and investors were eager to see more of it. During this great period of growth, companies such as Microsoft were not even talking about distributing a part of their earnings. But in the early 2000’s, there was more pressure on Microsoft (MSFT) to start distributing dividends. This is what they did with their first dividend back in 2003. This was a $0.08 distribution. Their most recent distribution was $0.20 per share offering a yearly dividend yield of 2.61%. In less than 10 years, the dividend grew by 250%. This is a pretty important dividend growth for any dividend stock.

 

More Techno Stocks Following This Trend

 

Microsoft is not an isolated example. In fact, I’ve put together a short list of interesting techno stocks paying a good dividend:

 

Apple -AAPL(recently started, 1.80%)

Cisco –CSCO(1.90%)

Corning Integrated –GLW(2.40%)

Texas Instruments –TXN(2.49%)

Hewlett-Packard – HPQ (2.63%)

Microsoft –MSFT(2.66%)

DELL–DELL(recently started, 2.70%)

Automatic Data Processing –ADP(2.91%)

Intel –INTC(3.18%)

Analog Devices –ADI(3.24%)

Applied Materials –AMAT(3.27%)

CA Technologies – CA (3.89%)

Seagate Technology – STX (4.39%)

Verizon – VZ (4.60%)

Garmin – GRMN (4.88%)

AT&T – T (5.04%)

 

As you can see, there are a lot to choose from and I didn’t even dig into med-small caps! We can see several companies heading towards this path, even Google declared a 1 time dividend recently. I would bet they will start paying regular dividend in a few years.

 

Why Techno Stocks Are Paying Dividends?

 

The question is; why in the world a would a company pay dividends? According to the financial theory, a company should pay dividends when it can generate an investment return equal to the risk free plus the premium investor are asking for taking a risk. The thing with techno stocks is that they are able to grow and generate profits. But several of them are cash rich and are not able to manage enough projects to use its liquidity. This is why they have been sitting on several million sleeping in their accounts.

 

In a highly volatile market, these companies are making a clever move. Investors will want to get paid for waiting and bonds are not offering an interesting return. This is why cash rich companies can attract more investors by distributing a small part of their wallet.

 

The technologies are not exploding as they used to either. Microsoft is probably the best example. It shows a constant growth but it’s not booming anymore. The reason is simple; most people have a computer and run windows. Even emerging markets are being flooded by technology!

 

A Great Combination of Dividend & Growth

 

What I like the most about techno stocks is that most of them offer a good dividend yield with a low payout ratio (besides AT&T and Verizon!). Companies such as Dell, Apple, Garmin, Microsoft, STX, Intel and others are showing a payout ratio under 50%. So while they grow their business, they have enough room to provide both capital appreciation and dividend growth. They probably show a better show a better growth than most consumer stocks and they can now offer a similar dividend distribution.

 

In the upcoming years, I’m thinking of adding more techno stocks in my portfolio, what about you?

 

 

Disclaimer: I own shares ofINTC, STX.

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Comments

  1. Mike says

    Her Charlotte,

    I just met with a 85 years old with 20% of his portfolio in the stock market. I don’t think age should play in your investment decision :-).

  2. says

    I like a lot of these companies and think there is room for several of them in a diversified portfolio and even as core holdings.

    I am long INTC, and will probably initiate a position in ADP within a year.

  3. says

    First off, I do not know if I would consider T or VZ to be true technology companies. They use technology, but they do not really create it like INTC or TXN.

    Also: How many of these have been paying and increasing their dividends? Dividend growth investors in general would not look at Apple (I would not) because it just started its dividend.

  4. says

    This is a good list. Generally I looks for companies with a long history of paying dividends like +10yrs, over 50yrs would be even better. But I doubt the companies on this list have been paying dividends that long.

    Nevertheless I do like T, VZ, MFST, INTC.

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