Until recently you rarely if ever heard technology mentioned as a good sector to search for dividend-paying stocks to buy.
Technology companies for decades have eschewed paying dividends to shareholders – to grow, you had to spend money. They plowed their annual profits back into the company, spending on research and development or acquiring smaller tech companies that improved their product offerings.
Only the largest tech companies like International Business Machines Corp. (NYSE: IBM) ever paid meaningful dividends to their shareholders. If a tech stock paid a dividend, investors would take it as a sign that the company had matured and was no longer a growth stock with meaningful opportunities for appreciation.
In fact, a dividend declaration by a technology company could often lead to a sizable stock decline.
But those days have changed.
How Tech Companies Evolved Into Dividend-Paying Stocks
Tech stopped shunning dividends in the 1990s when tech stocks went through a boom phase.
That's because institutional investors have mandates that prevent them from buying anything other than dividend-paying stocks, and they felt they were missing the action in the technology and Internet sector. They began to pressure tech stocks to pay a small dividend so they too could participate in the runaway rally.
Since then we have seen many of the tech giants initiate regular dividend payments to their shareholders. They were never intended to be significant but things have changed dramatically in the last decade.
Today many of these tech giants have seen their stock prices decline as their cash balances increased. They have raised the dividend to the point that tech stocks can now be a meaningful addition to income portfolios – especially for pre-retirement investors looking for income streams that will still be healthy 10 years from now.
Here are a couple examples of some of the best sources of yield in tech.
Stocks to Buy: The New Tech Dividend-Payers
Say an investor bought shares of Cisco Systems Inc. (Nasdaq: CSCO) the world leader in networking equipment. At today's price the stock yields 2.7%, or almost 50% more than a secure fixed-income investment.
Cisco is earning in excess of $8 billion in profits right now and this could easily more than double over the next decade. They also have more than $47 billion cash on their books. They have been using the cash to reward shareholders and the annual dividend was just increased by 75%. It is easy to see that the dividend payout could grow by four-fold or more over the next decade.
At the end of the 10-year period, that investor will own an investment that is now yielding more than 10% on the original investment amount. It is also highly likely that the shares will be worth more than the investor paid for them as the price of the stock increases along with Cisco's profits.
Another good tech stock serving as a dividend-paying stock is Corning Inc. (NYSE: GLW).
At the current price this stock yields 2.9% — and could well be one of the great growth stocks of the next decade.
There is almost no fast-growth market the company is not exposed to for the next decade. Corning's glass products are used in smartphones, flat-screen television sets, air cleaners, biotech and medical labs, fiber optic cable, and emission control products. Their new Gorilla glass is being well received by leading smartphone companies including Apple Inc. (Nasdaq: AAPL) and Google Inc. (Nasdaq: GOOG).
The company is earning north of $2 billion annually and has over $6 billion of cash and short-term investments on hand. They are expected to grow the dividend at close to 20% annually for the next five years or so at least.
Again, it is not unreasonable to project that the dividend could at least triple over the next decade. Our happy investor arrives at retirement with an investment yielding more than 9% on the initial investment and it is highly likely that the principle balance is much higher due to the company's strong growth over the period.
Even if stock prices do nothing much over the next decade, the growth of the income stream will make tech companies some of the best dividend-paying stocks to buy now.
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