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All Contents © 2017The Kiplinger Washington Editors
By Nellie S. Huang, Senior Associate Editor
| Originally published October 23, 2015
Time was, technology stocks rarely paid dividends. Today, the tech sector is the second-biggest provider of dividend payments in Standard & Poor’s 500-stock index, behind only financial firms.
Investing in dividend-paying stocks has its advantages, especially during market downturns. They tend to hold up better than the broad market when the S&P 500 loses ground, according to FactSet Research Systems, a financial data firm. Tech dividend payers tend to be well-established companies with solid balance sheets and a record of boosting payouts regularly since initiating them. And many are reinventing themselves in recognition of rapid changes in technology.
All five of the tech stocks described below yield at least 2.8%, well above the S&P 500’s 2.1% yield.
Prices and related figures are as of October 22. Price-earnings ratios are based on estimated earnings for the next 12 months.
Share price: $29.01
Market capitalization: $147.6 billion
Dividend yield: 2.9%
Price-earnings ratio: 12
Cisco (symbol CSCO) is a leader in computer networking. That’s old technology in a world where mobile and cloud computing are becoming increasingly important. But as Cisco moves into new tech, such as cloud networking and online security, having a roster of satisfied (and somewhat captive) old-tech customers to pursue will be a plus. What’s more, says research firm S&P Capital IQ, the company’s broad networking expertise gives it an edge over many smaller rivals because it can offer clients “holistic solutions” rather than just single products.
The firm is working to beef up its new-tech services offerings. It has crafted a number of strategic alliances with other firms, including cloud-computing firm VMware (VMW) and NetApp (NTAP), a data- and cloud-storage company. Cisco, which has a long history of expanding through acquisitions, has been on a buyout binge lately, having purchased six firms in 2014 and six more so far in 2015. And with $60 billion in cash and short-term investments in its coffers, Cisco can afford to make many more deals.
Cisco is growing modestly. Revenues in the fiscal year that ended last July were 4% higher than in the previous year, though earnings jumped 17%. Analysts expect profits to rise 4%, to $2.30 per share, in the fiscal year that ends next July. But Cisco’s stock is inexpensive, selling for 12 times year-ahead earnings. That compares with a P/E of 16 for the overall stock market and 17 for the tech sector.
SEE ALSO: Best Dividend Stocks of the S&P 500
Share price: $34.40
Market capitalization: $163.6 billion
Dividend yield: 2.8%
Price-earnings ratio: 15
Intel (INTC) is practically synonymous with personal computers; the firm makes the microprocessors that serve as the brains of PCs. But that’s just the problem: The heyday of personal computers is long gone, and slumping PC sales have hurt Intel. Sales of Intel’s computer chips shrank 7% in the third quarter compared with the year-earlier period.
The good news is that sales of chips for servers in cloud-computing data centers brought in $4.1 billion for the quarter, 12% more than in the same quarter the previous year. The data-center chips business is also more profitable than the computer-chip business. The operating profit margin (operating profits divided by sales) for data-center chips was 49%, compared with 24% for PC chips. Perhaps even more exciting, Intel is working hard to develop modem chips to sell to Apple. A deal would be a “positive catalyst” for the stock, says Credit Suisse analyst John Pitzer.
Relative to other chip makers, Intel shares look cheap. The stock trades at 15 times estimated year-ahead earnings, compared with an average P/E of 19 for the semiconductor sector, according to Thomson Reuters. Even better, Intel has a long track record of raising dividends. It has raised the payout in nine of the past 10 years, including a 7% boost that took effect in the first quarter. Alan House, an analyst at the Value Line Investment Survey, expects Intel to soon announce a 4% increase in next year’s dividend rate.
Share price: $60.43
Market capitalization: $95.0 billion
Dividend yield: 3.2%
Price-earnings ratio: 13
Each time a smartphone user makes a call on a network that uses CDMA technology, Qualcomm (QCOM) collects a royalty. The company develops and licenses wireless technology and makes chips for mobile phones. Brian Colello, an analyst at Morningstar, expects Qualcomm will continue to collect royalties on 3G and even 4G technologies for at least the next decade.
The positives notwithstanding, Qualcomm’s stock has been in a tailspin since hitting a high of $82 in April 2014. The main problem is that sales growth has slowed dramatically. Revenues rose at an annualized rate of 19% during the five-year period that ended in September 2014. But analysts estimate that revenues dropped 5.5% during the fiscal year that ended in September 2015, and they see a drop of 5.7% in the September 2016 year. Qualcomm’s chip business has suffered from stiff price competition as well as the loss of a big customer: Samsung announced last January that its Galaxy S6 smartphones (and, presumably, future models) will forgo Qualcomm chips for ones developed in-house. Moreover, investors worry that Intel and others could make dents into Qualcomm’s position as the dominant supplier of modem chips to Apple, says UBS analyst Kulbinder Garcha.
But a restructuring plan announced in July, which will shave $1.4 billion in annual expenses, among other things, could boost Qualcomm’s earnings by $0.30 to $0.40 per share in the September 2016 fiscal year, says William Blair analyst Anil Doradla. The company has also hinted that it is considering splitting the licensing business from the chip-making operation, a move that many analysts, including Doradla, view positively. And although Qualcomm could hit a few speed bumps down the road, a lot of the risk has been rung out of the stock, which trades at a low 13 times estimated year-ahead earnings.
Share price: $48.03
Market capitalization: $384.1 billion
Dividend yield: 3.0%
Price-earnings ratio: 17
CEO Satya Nadella’s mission to reinvigorate Microsoft (MSFT) by shifting its focus from desktop computers to mobile and cloud computing is moving ahead. But turning around this software battleship may take years.
Still, the company is making some headway. Cloud computing has become Microsoft’s fastest-growing business segment. Microsoft disclosed in its earnings report for the July-September quarter, released on October 22, that cloud-related revenues increased 13% from the same period a year earlier. Sales of Azure, Microsoft’s cloud service, more than doubled from the year-earlier period. Although revenues fell for the quarter, investors were heartened by the cloud results and better-than-expected earnings and sent the stock up about 10% on October 23.
Microsoft’s 2014 acquisition of Nokia’s mobile phone business was too little and too late, in the view of some analysts. But the deal underscores Microsoft’s strategy to create its own ecosystem (much like Apple’s) of mobile devices, including tablets, phones, fitness trackers and yes, even personal computers. Whether these devices become big sellers remains to be determined. But when Microsoft unveiled its first-ever laptop, the Surface Book, in early October, it was the most buzz one of its product releases had generated in years.
And let’s not forget Microsoft’s bread-and-butter software business. Its Windows operating system—Microsoft released Windows 10 in July—and the Office suite of productivity programs run on 90% of the world’s personal computers. Charles Clark, an analyst at the Value Line Investment Survey, believes that Windows 10 will boost Microsoft’s results in the second half of the firm’s 2016 fiscal year.
Relative to other software stocks, Microsoft looks inexpensive. It trades at 17 times estimated year-ahead earnings, compared with an average P/E of 29 for the software and services sector. Meanwhile, there’s the dividend. Microsoft announced a 16% hike in the payout in September, ahead of analysts’ expectations. And Brent Thill, an analyst at UBS Securities, says he expects 10%-plus growth in dividend payments over the next few years.
SEE ALSO: Apple, Intel, Microsoft, Seagate -- Four Core Tech Stocks
Share price: $45.89
Market capitalization: $186.6 billion
Dividend yield: 4.9%
Price-earnings ratio: 12
Okay, we’ll admit that many folks don’t consider Verizon (VZ) to be a tech stock. Rather, they lump it into the telecommunications-services sector. But Verizon is clearly a big player in technology. It is the largest U.S. wireless carrier, through whose airwaves customers can surf the Web, and it also offers high-speed broadband Internet service, TV programming and traditional landlines, primarily in the northeast U.S. And Verizon is now a provider of digital content and video, through its $4.4 billion purchase of AOL. The deal, completed in June, brings in more paid digital content and video and the digital advertising revenues that come with that.
Meanwhile, the rest of Verizon is clicking along. The company disclosed in its third-quarter earnings report, released on October 20, that its Verizon Wireless unit added 1.3 million new subscribers in the period, bringing its total wireless accounts to 110.8 million. And the firm’s FiOS cable-TV and Internet business saw third-quarter revenues climb 7.5% from the same period a year earlier. Growth in both segments helped boost third-quarter earnings by 11%. Although analysts expect Verizon’s earnings to rise 18% in 2015, they see earnings growth of just 1% next year, in part because growing competition in the wireless business may squeeze profits.
But the 4.9% dividend yield is tough to ignore. Verizon has paid a dividend every year since its creation in 1984 with the breakup of the Bell System. The stock trades at 12 times estimated year-ahead earnings, compared with an average P/E of 14 for the telecommunications-services sector.
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