If you're hunting for dividends, you're probably searching for the usual suspects: electric utilities, phone companies and maybe a big energy firm. But you may be surprised to learn that the technology sector is also peppered with companies that pay healthy dividends, including such luminaries as Intel and Microsoft.
The Case for Old Technology Companies
Certain tech companies have become big dividend payers because as they've matured, they've changed from high growth firms that had to reinvest their profits to companies that generate more cash than they need. Consider CA -- an old-line software company, formerly called Computer Associates, that quintupled its dividend in January and now sports an impressive 3.7% dividend yield.
Top U.S. tech companies stockpiled record amounts of cash in 2011. This is in part because the sector recovered well from the 2007-09 global recession, as companies worldwide boosted spending on technology to improve productivity. Analysts predict that the tech sector will hold up well despite Europe's woes and weak consumer spending. Plus, tech stocks are cheap, selling, on average, at about 13 times projected 2012 earnings. By contrast, utility stocks sell at 14 times estimated earnings, and stocks of consumer-staples firms trade at 15 times earnings.
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Here's more on CA and five other tech stocks to consider buying for their dividends and for potential capital gains (share prices and related data are as of February 15).
CA (CA)
Stock price: $26.90
Dividend yield: 3.7%
CA's stock price has run in place for more than seven years, and the dividend hike is likely management's attempt to placate restless shareholders.
The Islandia, N.Y., company is a steady generator of cash, thanks to sales of its IT management software for mainframe computers used by large corporations and governments. That business, which accounts for 60% of sales, is steady but not fast-growing. Moreover, sales of new products declined in the quarter that ended December 31. Also, although CA believes it can boost sales growth for IT management software with the advent of the cloud computing craze, it must compete for a piece of that pie against several big players, including Oracle, IBM and Hewlett Packard. The stock, selling for 11 times estimated earnings of $2.50 per share for the fiscal year that ends in March 2013, seems reasonably valued. Analysts see earnings climbing 11% in the March 2013 year.
EarthLink (ELNK)
Stock price: $8.08
Dividend yield: 2.5%
EarthLink is in the midst of reinventing itself from selling Internet access to consumers to selling business services. The Atlanta company has been on a shopping spree, buying communication firms and broadening its offerings to Web hosting, voice services over the Internet, data storage, and virtual private networks for cloud computing.
Rolla Huff, who became CEO in 2007 and has been the force behind the expansion, has also streamlined EarthLink's operations, slashing the workforce by 70% and exiting the Wi-Fi business. All this upheaval led to some volatility in earnings from 2008 to 2010, but the company is now positioned to see better results. While you wait for other investors to catch on to EarthLink's transformation, you can bank on the stock's dividend yield. The shares trade at 34 times 2012 estimated earnings of $0.24 per share. Although the price-earnings ratio is high, some analysts see EarthLink as a play on cloud computing. Compared with other companies in the cloud, its stock looks like a bargain.
Intel (INTC)
Stock price: $26.58
Dividend yield: 3.2%
With 80% of the $30 billion-a-year market for microprocessors, which serve as the brains of personal computers, Intel is a cash-generating machine. The Santa Clara, Cal., company has a solid balance sheet and generates strong free cash flow (the cash profits left over after the capital expenditures needed to maintain a business). Intel is dedicated to sharing much of that cash with investors. It has paid a dividend since 1992, and over the past ten years the payout has increased at an annualized rate of 27%.
Intel will likely continue to dominate the microprocessor market, although there are concerns that the popularity of tablet computers could hurt PC sales and cause Intel's profits to slow. However, the company is making a big push into the market for chips for mobile devices, a fast-growing business. The stock trades at 11 times estimated 2012 earnings of $2.41 per share.
International Business Machines (IBM)
Stock price: $192.25
Dividend yield: 1.6%
IBM has transformed itself from a maker of low-profitability large computers to a high-profit provider of software and services, businesses that accounted for 80% of IBM's 2011 revenues of $107 billion. Big Blue now focuses on providing a range of services -- from analyzing data to help cities manage traffic better to making power grids work better.
IBM is one of the more seasoned dividend payers in tech land: The Armonk, N.Y., company has paid a dividend since 1913. And that's likely to continue. IBM's balance sheet, with $12 billion in cash and short-term investments, is rock solid. Moreover, IBM sees profits rising to $20 per share by 2015, up from analysts' estimated earnings for 2012 of $14.92 per share. IBM trades at 13 times this year's profit forecast.
Microsoft (MSFT)
Stock price: $30.05
Dividend yield: 2.7%
I can hear you groan at the mention of Microsoft. True, the stock has been a stinker for most of the past decade, even though the company has generated decent profit growth and has consistently topped earnings forecasts. But that could soon change. The company finally looks poised to cash in on the fast-growing mobile-devices industry. After past attempts to sell Windows phones failed, the Redmond, Wash., company is launching a smart phone that analysts think will be a worthy competitor to the iPhone and assorted Android-based phones. Rumors have the sleek Windows-powered Nokia phone, the Lumia 900, debuting in AT&T stores March 18 and will be priced at $100 -- half the price of the latest entry-level iPhone. In addition, Microsoft is expected to roll out a new version of its Windows operating system later this year.
Microsoft, which finished 2011 with $52 billion in cash, has raised its dividend every year since it started making distributions in 2003. The stock trades at 11 times estimated earnings of $2.68 per share for the fiscal year that ends this June.
Apple (AAPL)
Stock price: $497.67
Dividend yield: 0%Our last pick doesn't pay a dividend -- yet. With nearly $100 billion in cash and marketable securities, Apple certainly has plenty of wealth to share, and many analysts think the Cupertino, Cal., giant will start paying dividends soon. The buzz is that the company could announce a dividend as soon as February 23, the day of the company's annual meeting. "This would cause a new group of investors seeking dividends to invest in Apple and drive shares higher," says analyst Michael Walkley, of Canaccord Genuity, a Canadian investment bank.
Apple's dividend yield could turn out to be surprisingly juicy. Assuming that Apple paid out 45% of its free cash flow annually, analyst Kulbinder Garcha of Credit Suisse figures that the company could distribute $23.5 billion per year over the next five years and still wind up with a cash pile of $265 billion. If Apple were to pay out that much in dividends, the yield, based on the current share price, would be nearly 5%.
For our latest on Apple, see "5 Things Holding Down Apple's Stock -- And Why It Still Has Room to Run."
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