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All Contents © 2019The Kiplinger Washington Editors
By Dana Blankenhorn
| May 31, 2018
When you buy stocks, you’re trying to get returns from two places: growth and/or dividends. And for the longest time, tech stocks were bought for the former. 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. Great!
However, many technology companies are maturing – breakneck growth is behind them, and they need an alternative way to draw investors. Thus, many tech stocks are starting to deliver dividends, paying people to own them.
That doesn’t mean every tech firm offering up a regular distribution is done growing altogether. 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) recently hit $760 billion in market capitalization to surpass Google parent Alphabet (GOOGL) in market share.
Several tech stocks offer an ideal combination of dividend and growth potential. Here are eight picks that currently deliver that 1-2 punch.
Data is as of May 30, 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: $921.0 billion
Dividend yield: 1.6%
Everybody loves Apple (AAPL, $187.50)
Warren Buffett loves Apple. President Donald Trump loves Apple. And a lot of investors have made Apple – founded in 1976 by Steve Jobs, Steve Wozniak and Ronald Wayne – the world’s most valuable company, closing in on $1 trillion in market cap thanks to its top-notch gadgets and budding role as a cloud-based-services provider.
Even though Apple is more than 40 years old, the company still has plenty of growth in it. Shares have shot up more than 10% since it reported quarterly earnings in May – for its fiscal second quarter, revenues grew 16% and earnings per share improved by 30%. That was helped by its Services division (iTunes, the App Store and more), which grew revenues 31% year-over-year to $9.2 billion.
The company also had plenty of cash to dole out, too, granting shareholders a 16% increase to the dividend and promising to buy back $100 billion in stock.
Apple is a good example of why you shouldn’t just look at current yield. Right now, Apple yields just 1.6% now – but the payout has jumped about 92% since the company resumed regular dividends in 2012. In fact, investors who bought in around the time of Apple’s first dividend now are earning a 5%-plus yield on their shares. The lesson: Dividend growth matters, too.
Given Apple’s fat margins thanks to its premium-priced products and increasing reliance on cloud-based services, it should have the resources to continue expanding that dividend over time.
Market value: $31.7 billion
Dividend yield: 2.1%
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, $401.29). 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.
Like with Apple, Equinix doesn’t sport a generous current yield, at just 2.1%, but the promise is in the company’s ability to increase the dividend over time while also delivering capital appreciation. EQIX already has hiked the payout by 35% since 2015, when it reorganized as a REIT.
Market value: $11.4 billion
Dividend yield: 3.4%
Garmin (GRMN, $60.90) 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 is expected to improve its profits by high single digits this year, on roughly 5% revenue growth.
Market value: $259.3 billion
Intel (INTC, $55.68) 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 ballooned its payout by 135% over the past decade, including a 33.3% increase over the past five years.
But Intel isn’t exactly done growing, either. The company is among the Dow Jones Industrial Average’s top prospects this year, in fact, because of its dual appeal. On the growth front, Intel’s revenues for the first quarter improved by 13%, while adjusted earnings per share accelerated by 32% per share. That performance was largely driven by Intel’s data-focused businesses, which represented roughly half of the company’s Q1 sales.
Market value: $764.6 billion
Dividend yield: 1.7%
Microsoft (MSFT, $98.95) 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 $1.68 in annual dividends – only good for a yield of 1.7%, but the payout has 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.
The company’s net income last year was $21.2 billion – almost 75% better than it was just two years prior. Better still, the company logged revenues of nearly $90 billion for fiscal 2017, but nearly matched that in just the first nine months of its current fiscal year, which ends in June.
Again, that’s 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. Wall Street sees even more growth in Microsoft’s future, too, modeling double-digit revenue gains in each of the next two years, and expecting profits to improve by 22% in the same time period.
Market value: $86.0 billion
Dividend yield: 4.0%
Of all the stocks in this collection, Qualcomm (QCOM, $58.39) is the most speculative.
Qualcomm controls the technology in your mobile phone, and the dividend’s yield of nearly 4% makes it seem like a bargain. However, the company comes with some baggage.
The company 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. Revenue has been falling since fiscal 2015, and experts expect that number to remain stuck at about $22 billion for this year as well.
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.
Market value: $110.0 billion
Intel didn’t invent the integrated circuit. Texas Instruments (TXN, $111.85) 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.”
Shares have more than tripled over the past five years, and more capital gains could be on the way if Texas Instruments keeps performing as Wall Street expects. Analysts predict 13% annual profit growth over the next five years. But the company also is a dividend machine, expanding its payout from just 8.9 cents annually in 2004 to $2.48 per share at the current rate, which included a robust 19% hike last year. Financial planner Joseph Inskeep with Advanced Wealth Strategies Group in Round Rock, Texas, says the company’s “historic” dividend growth means TXN “should be on everyone’s buy list.”
Market value: $25.5 billion
Dividend yield: 2.3%
Western Digital (WDC, $86.53) 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.
Thus, despite earning just $397 million in fiscal 2017 and reporting a loss of $823 million in December – thanks to a massive one-time tax charge related to the Tax Cuts and Jobs Act’s repatriation tax – most analysts following the stock still consider it a buy. Among their bullish points are $2.3 billion in operating cash flow earned in the first six months of fiscal 2018, as well as more than $3.4 billion in fiscal 2017 – enough to sustain its dividend several times over.
Baird analyst Tristan Gerra upgraded the stock from “Neutral” to “Outperform” (equivalent of buy) and raised the price target on shares from $93 to $135, citing better-than-expected trends in NAND flash prices, as well as the company’s recent debt refinancing.
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