News flash: Dividends Pay!
Okay, perhaps that isn't actually a new idea.
Indeed, the importance of holding solid, steady dividend stocks is historically relevant, and can't be overstated. Savvy investors know that one of the most critical components in building wealth and successful long-term gains is selecting dividend paying stocks that consistently grow those dividends.
The numbers bear out the strategy and the graph on the left provides visual evidence: academic and financial studies show that since the 1930's dividends account for an ample supply of overall return to U.S. stocks. Indeed, during bear market periods, dividends keep returns in the black.
Perhaps even more important to yield and income-starved investors, dividend growth and income has far surpassed bond income since 1980 as you can see in the graph below. With bond yields currently stuck in the low single-digits, the trend is expected to continue into the foreseeable future. An active and broad dividend base will provide a steady income stream during market fluctuations.
One more piece of evidence: a study by Ned Davis Research found that between 1972-2008 dividend -paying stocks returned 7.6% per year compared to 0.2% for non-paying dividend stocks. That dramatic swing alone should be enough to convince any skeptic that dividend stocks must become a core portfolio holding.
It's more than just yield that drive the dividend train. Dividends provide a steady stream of income in the form of monthly, quarterly or annual cash payouts. In times of lagging stock prices or bear markets, these payouts not only cushion the fall in prices, but provide opportunity to reinvest in the stock at attractive prices.
The trick of course is to look for the "best of the best" dividend payers, and that group has historically been found on the S&P Dividend Aristocrats list of companies that have increased annual dividends for 25 or more consecutive years. There are 54 companies on that list today, from the well-known Exxon Mobil Corporation (NYSE: XOM), The Coca-Cola Company (NYSE: KO) and McDonald's Corporation (NYSE: MCD), to the more obscure Dover Corporation(NYSE: DOV) , Emerson Electric (NYSE: EMR)and W.W. Grainger, Inc. (NYSE: GWW).
What are missing from this list are technology companies. The tech sector is a relative newcomer to the dividend universe, but it's become a critical one. In 2013 tech companies distributed more cash dividends than any of the 10 S&P 500 sectors for the first time.
While dividend investors may reflexively turn towards the "Aristocrats," adding tech stocks to your dividend portfolio is a way to look ahead to the future "Aristocracy."
To get you started, we've identified three technology stocks that have broken the old sector mold, and hold the promise of enormous returns as they move into the next 25 years.
The tech sector is filled with iconic, ground-breaking, game-changer names we're all familiar with: Hewlett-Packard Company (NYSE: HPQ), Intel Corporation (Nasdaq: INTC), Microsoft Corporation (Nasdaq: MSFT), Apple Inc. (NASDAQ: AAPL), Google Inc (Nasdaq: GOOGL), and Oracle Corporation (NYSE: ORCL). All have shaped the world in incalculable ways and have helped change the way we work, play, and interact.
As growing companies that required cash to fund continued research and development projects, tech companies typically plowed earnings right back into their business models. Dividend payments were not a part of the product and innovation growth strategy, and calls from shareholders to give back were left unheeded.
In many cases, and particularly during the tech boom of the 1980's and 1990's, investors were also mollified as share prices for the high-flying sector soared. At one point in the cycle, Microsoft became the highest market value stock in the S&P 500, a position Cisco also held for a short period of time. Editor's Note: The fuse has been lit on the global "debt bomb." Evidence of this coming crash - and the steps you need to take now - are detailed in this just-released presentation. However, it all changed when the tech bubble burst in 2000-2001. Tech stock prices fell dramatically, and investors looked to the companies for new sources of return: dividends.
Twenty-five years of consecutive dividend increases is an impossible list for any tech stock to make today, but its tomorrow we want to look at. Indeed, it's a good bet that each of these four technology giants will be on the Dividend Aristocrat list when that 25-year mark arrives, but there's no time like the present to get started.
We're sure of these shares' future prospects because they all follow the five rules for finding the best tech stocks that Michael A. Robinson laid out in Strategic Tech Investor. They're the key to spotting the companies that generate real tech wealth:
And with those in mind, here's the next generation of tech dividend aristocrats...
Future Aristocrat No. 1 Intel Corporation Why Intel Corporation? Simple: the company started its dividend policy earlier than any other major tech player, and is actually creeping up on the magical 25-year mark. What started out as $.01 per share on a quarterly basis (split-adjusted) has grown exponentially, rewarding investors who've held on through dips and peaks.
Intel is one of the mighty WinTel duopoly that dominated the computing industry for nearly a decade (we'll get to the second partner in a moment). Intel's chip technology breakthroughs helped power the PC industry forward, and their momentum shouldn't waver as we hurtle into the mobile age. The company continues to innovate, just recently announcing another breakthrough that Michael Robinson believes will lead to huge profits that will help power its dividend policy. Take a look at the graph and table on the right, and you'll instantly see why Intel is headed toward the Aristocracy.
Intel's policy of divided distributions is unabated since inception in 1992, and with a 29% compound annual growth rate, Intel shareholders have seen their patience with the stock rewarded.
The future looks just as bright. With a payout ratio of just 45%, Intel has plenty of room to run for dividend increases. Free cash flows are steady, and as the leading chip maker in the world, Intel is headed for Aristocracy.
Future Aristocrat No. 2 Microsoft Corporation The second part of the WinTel duopoly is Microsoft, who was also an early adopter of paying dividends, and has kept up a steady beat since inception.
It's been a rocky 10-year stretch for Mr. Softy, as its stock price fell into virtual "Dead Money" territory, trading within a range in 2002-2011 that saw minimal appreciation for shareholders. However, a $3.00 per share "special dividend" in 2003 kicked off a quarterly dividend payout that started at $.08 cents per share (quarterly), helping shareholders boost what were marginal yields.
Microsoft's stock price turnaround since 2011 (up over 200%) has been powered by its embracing mobile world technologies, expansion of its still ubiquitous Windows platform into the cloud, and most recently the energy jolt of new CEO Satya Nadella.
With Windows and its enterprise business pumping out profits at a record pace, Microsoft is well positioned to join the Aristocracy in just a few short years as we can easily see on the graph and table at right.
Microsoft held its dividend steady at the height of the financial crises in 2008-2009, but has made up the ground nicely in the intervening years. With cash and cash flow at an unimaginable $109 billion, Microsoft could virtually shut down any new production and still increase dividends for the next 25 years without missing a beat. A 43% payout ratio virtually assures the latter.
Here's the wildcard tech dividend play, but the one that has the greatest potential, too.
Future Aristocrat No. 3 Apple Corporation Apple started up a dividend policy in the 1980's, but severe financial difficulties forced then-CEO Steve Jobs to suspend the policy in 1995. Apple has changed the world since that time, and with it the fortunes of investors, who've seen Apple's stock soar, and its dividend reinstated in 2012.
Perhaps no company today has the product innovation firepower and financial muscle to offer the promise of Dividend Aristocracy some 23 years from now.
Indeed, since reinstituting the dividend, Apple's managed to increase it twice, and an annual 11% compounded growth rate. And there is room for more for a period far beyond the near future. In April Apple announced a massive $130 billion "return of capital" program to its shareholders, saying it planned to increase its dividend on an annual basis.
Apple distributed over $11 billion in dividends in 2013, yet because of its profitability, the payouts as a percentage of free cash flow are extremely manageable, and investors can look towards Apple for dividend increases far into the future.
A look to the right provides ample evidence to suggest an investment today will pay off for a lifetime.
Apple's cash flow and cash on hand largesse is almost as impressive as that of Microsoft. What's more impressive to shareholders is the 29% payout ratio. If Tim Cook is as good as his word, investors will see Apple start to pick up the pace over the near term, and continue to reward us in the long term.
Indeed, Apple can seemingly bump up its dividend at will.
Dividend investing is, and will always be, a critical, core portfolio holding. We want long-lasting companies that have the chops to stand the test of time for product innovation, management expertise, and financial acumen. When it comes to those attributes, these three technology giants top of the list.
Technology stocks are no longer the dividend income pariahs they were thought to be, and an investment in any, or all, three of these future Dividend Aristocrats, will compound your returns into a windfall.
Dividend Aristocracy for tech stocks is just a few years away, and these three will pave the way.
Editor's Note: Michael Robinson is one of the top financial analysts working today. He's a Pulitzer Prize-nominated writer and reporter, lauded by the Columbia Journalism Review for his aggressive style. Michael's strategic insights have made readers of his monthly tech investing newsletters Nova-X Report and Radical Technology millions. He also explores "what's next" in the tech investing world at Strategic Tech Investor.
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