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All Contents © 2018The Kiplinger Washington Editors
By Dana Blankenhorn, Contributing Writer
| November 5, 2018
The name of the game in investing is “total return.” When you buy a stock, your total return comes from two places – price appreciation and dividends. For the longest time tech stocks were never mentioned hand-in-hand with dividend stocks. Pick up Amazon.com (AMZN) for $300, sell half at a thousand bucks a few years later, and you’re sitting on free shares worth $1,600 each a year after that. That’s the blueprint!
Many tech stocks used to offer share splits as their prices rocketed higher. However many technology companies are maturing, and with breakneck growth in the rear-view mirror, and they need a different way to draw investors. The answer, for many, has been to start delivering dividends, paying investors for owning their shares.
To be clear, tech stocks that pay dividends aren’t done growing. The increased presence of technology in all aspects of human life means that there’s still plenty of upside, even for Wall Street’s biggest tech companies. To wit, old-guard blue chip Microsoft (MSFT) has surpassed Google parent Alphabet (GOOGL) and Facebook (FB) in market value this year, and it’s neck-and-neck with Amazon.
Here are 10 tech stocks that offer an ideal combination of dividends and growth potential. They might not be the flashiest names in the sector, but they deserve attention nonetheless.
Data is as of Nov. 4, 2018. Stocks are listed in alphabetical order. Dividend yields are calculated by annualizing the most recent quarterly payout and dividing by the share price.
Market value: $985 billion
Dividend yield: 1.3%
Everybody loves Apple (AAPL, $207.48). Warren Buffett loves Apple. President Donald Trump loves Apple. And a lot of investors made Apple – founded in 1976 by Steve Jobs, Steve Wozniak and Ronald Wayne – America’s first $1 trillion company based on market capitalization.
However, Apple recently has fallen into a significant funk and given up that $1 trillion price tag. It suffered its worst performance in more than four years on Friday, Nov. 2, in response to a quarterly earnings report that beat expectations, but included disappointing guidance and a revelation that Apple will no longer report unit sales in any of its products.
That sparked immediate panic because the assumption is Apple expects less-than-impressive iPhone and other product sales going forward, even if margins continue to improve. That fear was further fueled by flat iPhone sales for the quarter.
That said, there are reasons for optimism. For one, it appears Apple will shift its focus on its Services division (iTunes, Apple Pay, etc.), which has been a shining bright spot for the company over the past couple years. And some analysts believe this change in disclosure, while painful in the short-term, will benefit Apple over the long run.
Also don’t forget that Apple remains a cash-generating machine that, earlier this year, promised to buy back $100 billion stock and tacked on another 16% increase to the dividend. The payout has jumped about 92% since the company resumed regular dividends in 2012. While Apple’s current yield is a mere 1.3%, investors who bought in around the time of Apple’s first dividend now are earning a 5%-plus yield on their shares.
Market value: $207.9 billion
Dividend yield: 2.9%
Cisco Systems (CSCO, $45.48), whose networking gear helped build the Internet, is now trying to reinvent itself as a subscription company as its networking technology itself slowly evolves into software.
Along the way, Cisco has become a solid dividend stock. Its 33-cent quarterly payout is almost double the 17 cents it delivered in early 2014. The stock has roughly doubled over the same time frame.
One primary focus of CEO Chuck Robbins has been computer security. Cisco now has a suite of such products, available by subscription, like other cloud-based software. The company continually adds to it, too, most recently by adding Duo, which offers “two-factor security” that calls users when they try to sign-in to verify their identity. Other security acquisitions made in the last two years include Observable Networks and Skyport Systems.
Cisco reported a huge jump in fiscal fourth-quarter earnings in August, from 48 cents per share to 81 cents, translating into a mere 41% dividend payout ratio.
Small wonder that most of the 30 analysts following Cisco currently have it on their buy lists.
Market value: $31.5 billion
Dividend yield: 2.4%
The cloud is one of the biggest tech trends of our time. Cloud computing, delivered by “hyperscale” data centers, have been making investors rich since the combination of cheap hardware, open-source software and virtual operating systems were developed last decade.
But connecting clouds can be as profitable as running them. Data centers where the fiber lines of clouds often connect are mostly owned by real estate investment trusts (REITs) – a business structure for property owners/operators that requires most profits to be redistributed as dividends.
One of the best-run such REITs is Equinix (EQIX, $392.43). Equinix has more than 190 data centers across 24 countries and is the world’s largest colocation data center by market share. But it doesn’t just offer infrastructure – it also provides data services, information protection and other solutions that make Equinix more than just a rent collector.
Equinix, like Apple, doesn’t deliver a particularly high yield, at just 2.4%. But again, like Apple, it’s important to consider the company’s ability to increase the payout over time. EQIX’s payout has grown 35% since 2015, when it reorganized as a REIT, so investors should be encouraged on that front.
In its most recent quarter, Equinix grew revenues by 18% year-over-year to 1.26 billion, and its guidance of $1.596-$1.636 billion in adjusted funds from operations (AFFO, an important measure of REIT profitability) would represent roughly 12% improvement from 2017.
Market value: $12.5 billion
Dividend yield: 3.2%
Garmin (GRMN, $66.15) is the house that the Global Positioning System (GPS) built. GPS can tell you where you are, to within a few feet – and Garmin has been utilizing that technology since 1989.
Garmin was co-founded by American businessman Gary Burrell, who remains chairman emeritus, and Taiwan-born engineer Min H. Kao, now executive chairman. The company is known for GPS receivers, and moved its incorporation to Switzerland in 2010, although its main office remains outside Kansas City.
Garmin only has a float of about 188 million shares, 34% of which are held by corporate insiders. Kao and his family retain the largest single stake in the company, but they have been steadily selling shares in a planned way for tax purposes. This plan minimizes disruption for other shareholders.
While you might think a company based around GPS might be dead in the water considering every phone has access to things such as Google Maps, Garmin’s still going strong thanks to a renewed focus on wearables (smartwatches and activity trackers), often ruggedized and with satellite phone capability for use in the wilderness.
The company raised its earnings guidance in June, expecting to earn $3.30 per share on revenue of $3.3 billion. Garmin made a good stride toward that in its third-quarter results, when it reported profits of $1 per share, up 33% YoY, that were a quarter better than expected. Also encouraging: GRMN snapped years of dividend stagnation this year with a small hike to the June dividend.
Market value: $215.0 billion
Dividend yield: 2.6%
Intel (INTC, $47.11) looked like it was going to be left behind at one point as the PC industry it had a stranglehold on deteriorated, and as it failed to latch on to the mobile trend. But it has reinvented itself this decade as a supplier of chips and software to cloud data centers.
Intel is the home of “Moore’s Law,” described in a 1965 article by co-founder and (later) President Gordon Moore as the idea that integrated circuits double their density, at the same price, every year. It is this concept, which Intel has made a reality, that created the modern technology world. Everything else – PCs, the Internet, devices and clouds – grew out of this central idea.
Intel, once a major growth play, has emerged as a solid dividend stock. It has more than doubled over the past decade to its current 30 cents per share.
But INTC isn’t exactly done growing, either. The company reported a monster earnings beat for its third quarter – $1.40 per share versus $1.15 per share expected – and topped expectations for Q4 guidance. Things were so good that it upgraded its full-year guidance, too. The growth no longer comes from PCs, but from newer streams such as supplying data centers.
All this is happening despite the resignation of CEO Brian Krzanich in June and the fact that Intel has yet to hire a permanent replacement.
Market value: $815.7 billion
Dividend yield: 1.7%
Microsoft (MSFT, $106.26) was nicknamed “Mr. Softee” because of its dominance of PC software in the 1990s and 2000s. But under CEO Satya Nadella, Microsoft could easily be called “Mr. Cloud” today, as its Azure cloud (and applications built on it) has become one of the most stable profit centers around.
Microsoft pays out $1.84 per share in annual dividends – only good for a yield of 1.7%, but the payout has more than tripled since 2010. It costs Microsoft $13 billion annually to service that dividend at its current rate, which isn’t a small thing. But MSFT can easily foot the bill; its net income in 2017 was more than $21 billion, nearly double what it was in 2015.
Long-term debt of $76 billion could be paid off at a stroke with $133 billion in cash and long-term investments. Even its capital budget of over $10 billion is manageable.
Again, this financial heft is made possible because Nadella shoved Microsoft into the modern era by taking the focus off Windows and Word and instead emphasizing cloud services, big data and other pivotal technological trends.
Best of all, Microsoft is once again a growth company. It had revenue of nearly $97 billion for fiscal 2017 and $110 billion for the year ending in June, a growth rate of 14%.
Market value: $185.0 billion
Dividend yield: 1.6%
Oracle (ORCL, $48.83) came into its own as the dominant provider of database management software in the 1990s, and has transformed itself since acquiring Sun Microsystems in 2010, most recently by becoming a cloud player.
The tech company also became a dividend stock over the past decade, starting at 5 cents per share, quarterly, in 2009, then escalating that payout to 19 cents quarterly as of this year.
Oracle’s initial resistance to the cloud, followed by a late conversion, has left it with a lot of catching up to do. Founder and chairman Larry Ellison now says the company’s future now hinges on its success in cloud applications and its autonomous cloud database.
Oracle’s acquisition strategy has also shifted from database applications to cloud services, such as Vocado, which works in financial aid, and Iridize, which helps bring people on to cloud applications. Over the last two years it also brought ZenEdge, a security provider, and Wercker, a middleware company, into its suite of services.
Analysts were disappointed by Oracle’s cloud revenue in the most recent quarter, but earnings of 59 cents per share were still three times greater than the dividend. Co-CEO Mark Hurd insists it can dramatically grow that revenue with applications. Oracle’s dividend growth should by the stock a little patience.
Market value: $93.0 billion
Dividend yield: 3.9%
Qualcomm (QCOM, $63.33) controls the technology in your mobile phone, and the dividend’s yield of nearly 3.8% makes it seem like a bargain. But know the full story before you jump in.
Qualcomm has been engaged in a multiyear battle with Apple over the patent royalties it demands from phone makers. Apple wanted a discount, given its size, and Qualcomm wants a 5% cut of all iPhone revenue. Now the two companies are engaged in court battle as Apple seeks new suppliers, including Intel. Until the case ends, Apple will not be paying royalties to Qualcomm, which has hit the latter hard. A QCOM lawyer recently said that Apple was $7 billion behind on patent royalties.
So, why Qualcomm? Because QCOM is among the stocks that should shine with the arrival of 5G technology. The fifth-generation mobile network will offer far more capacity than what’s currently available, as well as higher speeds, and will “redefine a broad range of industries with connected services,” to put it in Qualcomm’s words. And Qualcomm is one of the companies building the technology that will power this 5G revolution, giving it a realistic shot at a comeback bid.
Moreover, QCOM boasts a solid balance sheet of nearly $36 billion in cash and short-term investments versus a little more than $15 billion in long-term debt. And despite its issues with Apple, Qualcomm still saw fit to boost its quarterly payout 9% earlier this year.
Market value: $91.3 billion
Intel didn’t invent the integrated circuit. Texas Instruments (TXN, $95.06) did, along with a company called Fairchild Semiconductor, from which Intel eventually emerged.
TI, as it’s called, decided to focus on digital signal processors (DSPs), which turn analog inputs, sound and pictures, into digital bit streams computers can process, in the 1980s. Today it may be best known as a leader in adding intelligence to ordinary objects, the so-called Internet of Things.
Personal finance expert Matthew Ure, a vice president at Anthony Capital in San Antonio, says, “It is hard to imagine a world wherein Texas Instruments will not become more and more relevant.”
Texas Instruments also is an incredibly relevant dividend stock. The company’s shares have gained more than 120% over the past five years, but in fact have been outpaced by the dividend, which has grown 157% to its current quarterly payout of 77 cents per share. Financial planner Joseph Inskeep says the company’s “historic” dividend growth means TXN “should be on everyone’s buy list.”
The company should have no problem affording that dividend going forward. Analysts predict 13% annual profit growth over the next five years.
Market value: $13.9 billion
Dividend yield: 4.2%
Western Digital (WDC, $47.77) is a maker of hard drives, which are in the process of being replaced by increasingly cost-effective chip memory. How long the replacement process lasts, and how long Western Digital can prosper in that market and pay shareholders for their investments, is the question.
Western Digital has tried to get ahead of market changes by packaging drives as “MyCloud” units, turning old PCs into virtual servers. It has also gotten into the chip memory business, buying SanDisk in 2016 and recently committing to invest $4.7 billion over three years to refresh its joint venture with Toshiba, which will keep the chips flowing.
But most analysts following the stock still consider it a buy. They point to $2.3 billion in operating cash flow earned in the first six months of fiscal 2018, and over $3.4 billion in fiscal 2017, sustaining about $600 million in dividend payments. The company’s third-quarter earnings declined year-over-year and missed expectations, but the resulting handful of analyst downgrades following that put most of the blame on an oversupply in NAND memory that could keep prices low.
Western Digital itself remains a good dividend payer whose annual $2 dole is just more than a quarter of this year’s expected profits. While that payout isn’t rising, it is safe.
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