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All Contents © 2017The Kiplinger Washington Editors
By Brian Bollinger, Contributing Writer
| October 2017
Many investors may be surprised to learn that some of the market’s best dividend stocks for both current yield and payout growth can be found in the technology sector.
After all, tech stocks are often characterized by fast earnings growth, rapid pace of change and significant investment in research and development to stay relevant. These traits often make it impractical for many tech stocks to pay dividends, and it shows broadly – the Technology Select Sector SPDR Fund (XLK), a proxy for the tech sector, yields just 1.4% to trail the 1.9% yield for the overall Standard & Poor’s 500-stock index.
However, the tech sector still boasts several high-quality dividend stocks that not only deliver a regular payout, but increase it consistently. These businesses tend to have dominant market share positions, unique competitive advantages and enough cash flow that it’s feasible to return much of it to shareholders in the form of (rising) dividends.
Let’s look at 11 of the best tech stocks to buy for their dividends.
Data is as of Oct. 20, 2017. Dividend yields are calculated by annualizing the most recent quarterly payout and dividing by the share price. Click on ticker-symbol links in each slide for current share prices and more.
Share price: $34.25
Dividend yield: 3.4%
Consecutive years of dividend hikes: 6
Cisco Systems provides a wide variety of communications products and services to companies of all sizes. Switches and routers – which essentially help move data between computer networks and devices to make sure it reaches the right place – are its primary offerings, combining to account for roughly 45% of total sales. However, that figure is declining as Cisco expands its other businesses, such as cybersecurity and Internet of Things applications; for instance, the company on Oct. 23 offered $1.7 billion to buy Broadsoft (BSFT) to bolster its collaboration offerings.
Still, the company has long dominated many of its core markets; for example, it recorded 54.7% market share in the ethernet switching market at the end of the second quarter of 2017, according to IDC. Overall, Cisco claims to own the No. 1 position in 10 of its major markets.
The company’s competitive advantages are largely derived from its sheer size, brand recognition, extensive distribution system (60,000 channel partners) and substantial portfolio of products and solutions. Morningstar analyst Ilya Kundozerov wrote earlier this year that “Cisco’s competitive position will remain sound over the next 10 years, and this view is reflected in our narrow economic moat rating.”
Cisco’s management team plans to continue returning more than 50% of its free cash flow to shareholders. That includes the dividend, which the company began paying in 2011. Cisco has raised its payout every year since at a 30% compound annual growth rate, and authorized a 12% hike in February 2017.
Cisco has plenty of room for continued dividend growth thanks to its stellar balance sheet (it holds more than twice as much cash as debt), consistent free cash flow generation, moderate payout ratio near 40% and durable business model.
Share price: $156.25
Dividend yield: 1.6%
Consecutive years of dividend hikes: 5
Apple is a major manufacturer of popular consumer electronics such as iPhones, iPads and Mac computers. But despite the short life cycle of consumer products such as smartphones, Apple’s unique ecosystem of hardware, software and third-party applications has helped it build a dominant and sticky business. Apple’s operating system, iTunes library, iCloud, services such as Apple Pay and numerous hardware devices work together to lock in customers.
The company’s brand power – brand consultant Interbrand ranks it No. 1 globally at a worth of $184 billion – favorable terms with suppliers thanks to its economies of scale, and quality product design have also created consumer loyalty and pricing power that has resulted in operating margins above 25% each year since 2009. As long as Apple provides a high-quality user experience and maintains its strong brand reputation, it can continue charging high prices for its lucrative iPhones. In fact, the iPhone X, which starts at $999, is the most expensive smartphone Apple has ever made.
Apple also has $261 billion in cash and investments – plenty of firepower with which it can develop (or buy) the next breakthrough product. In fact, Apple’s growing hoard of cash was one reason why the company became a regular dividend payer again in 2012 after suspending its quarterly dividend in 1996. The company has since raised its quarterly payout by 66%.
Argus analyst Jim Kelleher maintains a long-term EPS growth rate forecast of 13% for Apple, which combined with the firm’s excellent balance sheet and cash flow generation could continue fueling double-digit annual dividend growth. Perhaps that’s one reason why Apple is one of the largest positions in Warren Buffett’s dividend stock portfolio.
Share price: $78.81
Dividend yield: 2.1%
Consecutive years of dividend hikes: 13
Microsoft was founded in 1975 and is best known for its Windows operating system, which runs nearly 90% of desktop computers around the world. But there is much more to Microsoft today than personal computer operating systems. From its Office 365 productivity application suite – which includes the likes of Word and Excel – to its fast-growing Azure cloud platform and server solutions, Microsoft is a true software powerhouse.
That’s thanks to CEO Satya Nadella’s “mobile-first, cloud-first” turnaround strategy that he implemented to rejuvenate growth and strengthen the company’s competitive positioning after he became CEO in 2014.
Microsoft’s most notable success is arguably its Azure cloud services business, which is, by sales, the No. 2 provider of on-demand computing processing and storage behind only Amazon’s (AMZN) AWS.
The company’s business model also is shifting from one-time software license sales towards a more stable subscription-based revenue model in areas such as Office 365 applications. Microsoft also is investing heavily in fast-growing opportunities such as cyber security, machine learning and artificial intelligence.
Simply put, Microsoft’s business is increasingly focused on areas that have potential to deliver stronger growth and improved profitability over the coming years. In fact, CFRA Research equity analyst Scott Kessler reports that Microsoft’s non-GAAP earnings per share grew nearly 20% last fiscal year and “sees the EBITDA margins continuing to widen to 42%” for fiscal year 2019.
Microsoft began paying dividends in 2003 and has raised its payout every year since, recording 16.7% annual growth over the past five calendar years and authorizing a 7.6% increase in September 2017 to 42 cents per share.
Analysts expect Microsoft to grow profits by 12% annually over the next half-decade. Assuming Microsoft’s free cash flow (the cash left over after essential capital expenditures that can be used to fund dividend payments) payout ratio remains near 50%, dividend growth seems likely to continue at a high-single-digit to low-double-digit rate.
Share price: $49.25
Dividend yield: 1.5%
Consecutive years of dividend hikes: 8
Oracle provides a wide range of database and middleware software, application software, cloud infrastructure software, and hardware systems to more than 400,000 business customers. It’s one of two dominant players in the global enterprise software market – Germany’s SAP (SAP) is the other.
Oracle’s products save companies time and money by making them more productive. They’re also well-integrated; switching to another vendor would be expensive or impractical for customers in many cases since they have valuable data stored on Oracle’s platform and are already trained on the company’s unique user interface. As a result, Oracle enjoys a substantial base of recurring revenue that gradually builds over time.
Oracle’s market is undergoing a meaningful transition from delivering software onsite to a cloud-based delivery model. The cloud has challenged growth in the company’s legacy on-premise database business, but Oracle is pivoting to the cloud. Morningstar analyst Rodney Nelson said, "The firm has begun to deliver meaningful results that should reinforce customer switching costs."
Oracle’s latest earnings report for the quarter ended Aug. 31 showed its strategy continuing to bear fruit, with 51% year-over-year growth in total cloud revenue. Software-as-a-service revenue was up 62%, and CEO Mark Hurd said, "Our cloud applications business continues to grow more than twice as fast as Salesforce.com."
Oracle has paid dividends since 2009 and last raised its dividend by 27% in March 2017. The company appears to have one of the safest dividends in the market because of its low payout ratio near 30%, excellent balance sheet (more cash than debt) and steady free cash flow generation.
Share price: $40.43
Dividend yield: 2.7%
Consecutive years of dividend hikes: 3
Intel is the largest global manufacturer of semiconductor chips today, with a primary focus on microprocessors and chipsets. These products act as the brains of computers and many other electronic devices, such as servers, tablets and wearable devices.
Microprocessors and chipsets are arguably two of the most important factors impacting the performance and functionality of PCs. While demand for PCs is gradually eroding as mobile devices continue growing, desktop and notebook computers still accounted for approximately 55% of Intel’s total revenue last year. Faster-growing segments such as data center processors, flash memory chips used for storage, and a variety of other chips used to enhance performance of electronics account for the remainder of Intel’s revenue.
More than 80% of PCs sold each year use Intel’s chips, thanks to the company’s focus on maintaining industry-leading advanced manufacturing processes. Intel spent more than $12 billion on R&D alone last year, representing a whopping 22% of its total revenue. Thus, barriers to entry are high; most companies lack the financial and technical resources and scale needed to effectively compete with Intel’s legacy businesses.
However, Intel’s priorities are evolving to adapt to changing market conditions. The company acquired semiconductor chip company Altera for $16.7 billion in 2015 to bolster its business in data centers and Internet of Technology devices. Intel also agreed to acquire Mobileye, a leading developer of camera-based software for autonomous driving, for $15.3 billion in March 2017.
On the income front, Intel has paid uninterrupted dividends since 1992 while rewarding income investors with 10% annual payout growth over the past 10 calendar years. The company’s moderate payout ratio near 40% suggests there is room for continued dividend growth.
Share price: $147.97
Dividend yield: 1.1%
More than 42 million consumers, small businesses and self-employed workers depend on Intuit’s QuickBooks and TurboTax software products to file taxes, pay bills and track their money. Intuit has built a strong competitive moat in these areas by making it relatively painless for customers to accurately complete essential compliance activities in a cost-effective manner.
Intuit also has done a nice job adapting to changing times. Specifically, Intuit is navigating evolving preferences for how its services are consumed, especially with the rise of mobile devices and the cloud. The company’s online customers have grown by 12% annually since fiscal year 2013 while desktop customers have declined by 4% per year. And the company achieved 58% growth in its QuickBooks Online subscription service last fiscal year.
Moving to more of a cloud-based business provides benefits including stickier recurring revenue and excellent free cash flow thanks to its scalable, high-fixed-cost model. Management, meanwhile, is targeting new areas within small-business finance and payroll services for growth.
Intuit is a relatively new dividend-paying stock, having initiated its first payment in 2011. Intuit is no slouch, however, increasing its annual dividend by 21% annually over the past three years, and management approved a payout hike of 15% in August 2017.
Intuit forecasts non-GAAP diluted earnings per share growth of 11% to 13% for the fiscal year ended July 2018. If the company’s free cash flow payout ratio remains below 30%, income investors should continue to enjoy double-digit dividend growth in the years ahead.
Share price: $95.18
Dividend yield: 2.6%
Consecutive years of dividend hikes: 14
Texas Instruments is a global semiconductor design and manufacturing company that was founded in 1930. The company generates 86% of its revenues from analog chips and embedded processors, where it maintains market-leading 18% and 17% share, respectively. All told, it sells more than 40,000 products to a diverse base of approximately 100,000 customers.
Analog chips are used to monitor, transform or regulate pressure, light, temperature and other signals found in the real world. They can help regulate voltage and manage power usage, for example. Embedded processors include microcontrollers, processors and connectivity products. These products essentially act as the brains in all sorts of electronic devices.
The company focuses on products with long lifecycles, such as cars; industrial and automotive end markets accounted for 51% of the company’s revenue in 2016. These markets tend to be characterized by a slower pace of change and do not require major investments to maintain advanced manufacturing technologies and processes. When combined with the company’s leading scale, Texas Instruments typically converts 20% to 30% of its revenue into free cash flow, which is used to pay dividends.
The company’s management is committed to returning all of Texas Instruments’ free cash flow to shareholders through dividends and share repurchases, which has made TXN an appealing dividend growth stock over the years. In fact, Texas Instruments has an impressive record of paying uninterrupted dividends since 1962, has raised its payout by 24.2% annually over the past five calendar years and announced a 24% hike in October.
Morningstar analyst Brian Colello believes Texas Instruments will expand its operating margins from 36% in 2016 to 44% by 2021, further propelling free cash flow (and dividends) higher in the coming years.
Courtesy TE Connectivity via Business Wire
Share price: $88.47
Dividend yield: 1.8%
Consecutive years of dividend hikes: 7
TE Connectivity’s roots can be traced back to 1941, and today the Swiss company manufactures a wide range of connectivity and sensor products.
TE generates 53% of its revenues from the Transportation Solutions segment, which primarily supplies the automotive industry with connector systems, components, systems and tubing. Industrial and communications markets are also important, accounting for 26% and 21% of revenue last fiscal year, respectively.
Most of the products manufactured by TE Connectivity must be able to withstand harsh operating conditions and last for many years. The company’s engineering expertise, reputation for quality and global distribution reach make it a trusted partner for its diversified base of customers.
With a $170 billion addressable market, TE Connectivity’s 7.2% market share position indicates that the company has a long runway for growth, especially as more electronics components find their way into a wider range of products.
Part of management’s capital allocation plan is to return approximately two-thirds of free cash flow to shareholders, which has resulted in higher dividends each year since 2011. TE’s dividend has grown by 15.5% annually over the past five calendar years, and the company’s management raised the payout by an additional 8.1% in May 2017.
Morningstar analyst Rodney Nelson foresees continued margin expansion for the company, driven by increased automotive production, electronic content growth, and operating efficiency improvements. Nelson believes management’s long-term revenue growth target of 5% to 7% is achievable, which would be supportive of at least mid-single-digit annual dividend growth going forward.
Courtesy Corning Technology
Share price: $30.06
Corning, which has been in business since 1851, is an important player in the world of consumer electronics and the internet. The company is organized into five diverse business segments, but its largest profit contributor, Display Technologies, manufactures glass for liquid crystal displays (LCDs) used in televisions, notebook computers and desktop monitors.
Corning’s other segments produce everything from fiber optical cable for the communications industry to emissions control products and Corning Gorilla Glass used in smartphone and tablet displays. Given the volatile nature of glass prices, this diversification helps provide some stability to Corning’s overall results.
In fact, Corning expects its Optical Communications segment can become a $5 billion business by 2020, and strong growth in mobile devices can help double revenue from this platform within Corning’s Specialty Materials segment.
Argus analyst Jim Kelleher noted that Corning recently updated its strategic and capital allocation framework. The company is refocusing its product portfolio to improve return on invested capital, build new sales and profit streams, seek potential transactions around its focus areas. Corning’s financial strength also enabled it to commit to deploy $26 billion to $30 billion in cash through 2019.
The company’s dividend is a major beneficiary of the excess capital Corning has been returning to shareholders. Corning’s dividend has increased every year since 2011, notching 18.6% annual growth during the past five calendar years. Kelleher’s long-term earnings growth rate forecast is 10%, which suggests dividend investors can expect similar income growth given the company’s healthy payout ratio below 50%.
Share price: $104.99
Dividend yield: 4%
Crown Castle International is the largest provider of shared wireless infrastructure in the country, boasting roughly 40,000 towers and more than 29,000 route miles of fiber supporting small cell networks. It’s also technically not a member of the tech sector – it’s a real estate investment trust (REIT), a special business structure that is required to pay out at least 90% of its taxable income.
The company’s towers are leased out to wireless carriers, which deploy equipment on Crown Castle’s infrastructure to provide wireless services to consumers and businesses. This is a lucrative business model for Crown Castle because more than 80% of its revenue is recurring, and its site rental revenue is protected by long-term leases with terms typically ranging from five to 15 years and built-in price escalators.
As mobile data growth continues at a rapid clip, Crown Castle’s wireless infrastructure seems likely to become only more valuable. Even better, as additional tenants are added to its towers, the company typically enjoys an incremental margin in excess of 95%.
Favorable tower economics result in excellent free cash flow generation and an attractive dividend profile. CCI is one of the highest-yielding stocks held in Bill Gates’ dividend portfolio. The company began paying dividends in early 2014 and has since tripled its quarterly payout from 35 cents per share to $1.05, including an 11% increase in October 2017.
Management targets 7% to 8% long-term annual growth in dividends per share going forward. Considering the company’s capital-light business model and improved growth profile thanks to its July agreement to acquire Lightower and its 33,000 route miles of fiber, this goal seems well within Crown Castle’s reach.
Share price: $123.39
Dividend yield: 3%
Consecutive years of dividend hikes: 12
Digital Realty Trust is a REIT that supports the data center needs for more than 2,300 customers across a wide range of industries, including financial services, information technology and manufacturing. Some of Digital Realty’s largest customers include International Business Machines (IBM), Facebook (FB), LinkedIn and Oracle.
Digital Realty provides base buildings, where customers choose to supply the power components used in their data center, as well as turn-key services, in which Digital Realty supplies everything but the servers. Data centers are used by companies to store all sorts of digital information and can also serve as hubs for internet communications.
Digital Realty is an interesting dividend growth stock in part because of the fast-growing nature of its industry. Internet, cloud, mobile and video traffic are expected to grow at annual rates ranging from 24% to 46% through 2021, according to Cisco forecasts. Growth in Internet of Things devices will create even more information that needs to be stored in data centers.
Once a customer is in one of Digital Realty’s facilities, getting out isn’t easy. The company estimates that migration to a new facility costs customers between $10 million and $20 million. Such high switching costs, combined with the non-discretionary nature of server storage, have resulted in a historical average retention rate near 80% and total portfolio occupancy rate near 90% or higher in each of the last seven years.
That’s a combination for solid cash flow and steady dividends, which Digital Realty has paid each year since going public in 2004. The company’s dividend has increased by 12.5% annually over the past 10 calendar years, including a 5.7% hike in March 2017.
With analysts expecting high single-digit annual earnings growth over the next several years, Digital Realty is well-positioned to reward investors with continued dividend increases.
Brian Bollinger was long CSCO, INTC and ORCL as of this writing.
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