Dividends in the tech space are still relatively new, but there’s a handful of tech stocks that have been rewarding shareholders for over a decade.
Ten years ago, investing in the tech sector was a risk. Now, tech has become mainstream. It has become a staple in our lives and is quickly becoming a staple in our portfolios.
Even still, for dividend investors, tech companies are overlooked because they lack a long-term dividend-paying track record (think: 25-plus years, like the Dividend Aristocrats).
However, certain tech companies make for some of the best dividend payers because of their cash-flow-generating capabilities. Highlighted by billionaire Carl Icahn’s battle with Apple (NASDAQ: AAPL), these companies have a ton of cash on their balance sheets that would be better off in shareholders’pockets.
Some investors will argue that if a tech stock is paying dividends it has given up on growing earnings. That’s not necessarily true. The five stocks below have all managed to grow their earnings faster than dividend favorite Procter & Gamble (NYSE: PG).
Technology is here to stay. The technology sector makes up nearly 20% of the S&P 500 — more than any other sector. In 2010, there were but 32 tech companies in the S&P 500 paying a dividend. That number is up 38% in just four years.
The key is to focus on technology stocks with a proven track record of dividend increases. In the tech space, a decade seems like forever. But there are a handful of companies that have managed to increase their dividends every year for the last 10 years.
What’s more, all five companies below offer yields above the S&P 500 average dividend yield of 1.9%. And nearly all are cheaper than the S&P 500.
Without further ado, here are the top five tech stocks that pay dividends:
Tech Stock No. 1: Microsoft Corporation (NASDAQ: MSFT)
Microsoft has upped its dividend payment for 10 straight years now and now pays a 2.6% dividend yield.
Many people wrote off Microsoft after the rise of Apple, when Microsoft’s operating systems were falling out of favor. But with a new CEO at the helm, Microsoft is now focusing on its cloud business.
And the stock is up 28% in the last year, crushing the S&P 500’s 10% return over the same period. Even still, Microsoft trades at a forward price-to-earnings (P/E) ratio of just 15 (based on next year’s earnings estimates). The S&P 500 trades at a forward P/E of 17.
Tech Stock No. 2: International Business Machines (NYSE: IBM)
IBM offers a 2.8% dividend yield. The tech giant has paid a dividend for more than 50 years and has a streak of 14 years of dividend increases. Its payout ratio is just 27%.
Yet, shares of IBM are down 15% year-to-date after a large selloff due to revised earnings expectations. Like Microsoft, IBM is looking to shift more of its business away from hardware and toward the higher-margin cloud business.
If you’re a long-term investor, this could be the best buying opportunity in a long time. IBM is the cheapest of our five dividend-paying tech stocks, trading at a P/E of just 9 (based on next year’s earnings estimates). The last time its forward P/E was this low was in late 2008.
I’d also be remiss if I didn’t mention that famed billionaire Warren Buffett owns a large chunk of IBM. Buffett’s Berkshire Hathaway (NYSE: BRK-B) owns 7.1% of the tech giant and has it as one of its top three public stock holdings.
Tech Stock No. 3: Qualcomm (NASDAQ: QCOM)
Qualcomm offers a 2.4% dividend yield, which is just a 37% payout of earnings. Qualcomm’s streak of annual dividend increases stands at 11 years. And with negligible debt and nearly 15% of its market cap covered by cash on the balance sheet, it’s hard to find a better balance sheet in the tech space.
However, Qualcomm has been another underperformer over the last year or so in terms of stock price. The culprit has been concerns that the smartphone market is oversaturated. Yet, the market in China remains large, so it’s encouraging that Qualcomm is focusing its attention there.
Tech Stock No. 4: Texas Instruments (NASDAQ: TXN)
Texas Instruments’ dividend yield is 2.6%. It’s an underrated player in the semiconductor space, often overshadowed by the larger Qualcomm. But that doesn’t negate the fact that Texas Instruments has paid a dividend for 32 years, upping its payout in each of the last 10 years.
The company is still transitioning itself to an analog focus (think: power management and data converters) after exiting the mobile chip market. This transition should be a long-term positive when it comes to boosting margins and generating more cash flow for shareholders.
Tech Stock No. 5: Microchip Technology (NASDAQ: MCHP)
Our list concludes with one of the most underrated, and unknown, names in tech. Microchip Technology is another player in the semiconductor space, focusing on the communication space. It has a market cap of just $9 billion, so it’s not a small company by any means.
Its dividend yield is a healthy 3.3% – the highest of our five tech dividends. Microchip Technology is also expected to grow its earnings over the next five years at a rate that’s faster than any of the tech stocks above — at an average annual growth of 15%.
We first uncovered Microchip last month, when it upped its quarterly dividend for the 14th straight quarter. The bigger trend is that Microchip has upped its dividend for 12 consecutive years.
Technology is here to stay. We’ve already welcomed it into our everyday lives. Now it’s time to welcome it into our portfolios.
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