3 Tech Stocks for Dividend Lovers

The recent financial meltdown was replete with lessons for all types of investors. For dividend investors, though, one of the key lessons may have been the importance of diversification.

Historically, the banking industry was a prime fishing hole for dividend lovers. But hefty losses during the panic led to dividend-slashing all over the industry. Income-oriented investors that overexposed themselves to banks may have suddenly found their portfolios' yields badly battered.

Creating a truly diversified dividend portfolio can present some challenges, though, since not all industries are particularly dividend-friendly.

Tech and dividends, like peanut butter and guacamole
Just like the foods named above, I'm a fan of both the technology industry and dividends. Unfortunately -- in the case of the stocks at least -- the two aren't found together nearly as often as I'd like.

And it's not like tech companies can't support dividend payouts. Apple (Nasdaq: AAPL  ) and Google (Nasdaq: GOOG  ) are perfect examples of companies with a ton of cash on their balance sheet, hefty free cash flow, a stable business, and a belligerent refusal to pay dividends.

Fortunately, not all tech CEOs are as stingy as the folks at Apple and Google. Below are three tech stocks that I think would make excellent additions to any dividend lover's portfolio.

IBM (NYSE: IBM  )
Big Blue might get cockeyed looks from true dividend diehards thanks to its less-than-inspiring payout performance in the early and mid-90s. Specifically, the company was in the middle of a nosedive during that period and its dividend stagnated before being cut from $1.21 per share down to $0.25.

Since 1995, though, it's been a new ballgame for IBM and its investors in many ways. On the business side, the company has made the transition from being heavily exposed to low-margin, rapidly commoditizing business lines to being focused on high-margin areas such as technology consulting and software. Over that same time frame, IBM has grown its dividend every year, which has led to an annualized dividend growth rate of nearly 17%.

IBM hasn't been shy about using debt, but the company has its interest payments very well covered and has nearly $14 billion in cash on its books -- just in case.

The stock's current 2% payout may not draw yield chasers, but between the current payout, the track record of dividend growth, and the strength of the business, I don't think IBM will leave dividend investors feeling blue.

Automatic Data Processing (NYSE: ADP  )
Earlier this year, my fellow Fool Jordan DiPietro singled out ADP as "the best dividend stock, period." Though ADP might not be quite as high up on my list of dividend payers, I fully agree with Jordan that there is plenty to love about ADP.

As Jordan pointed out, one of the best aspects of ADP -- particularly for a company in the tech sector -- is that its business is so easy to understand. ADP provides outsourced services for crucial HR functions such as payroll processing. In exchange for its services, the company charges recurring fees, and, in the case of payroll processing, gets to collect interest on the funds that it holds.

And as great as the business is, the numbers may be even better. The stock currently yields 3.3% and the company has been paying, and growing, its dividend for a very, very long time. For the decade ending last June, ADP grew its dividend at an average annual rate of nearly 16%. And with total debt of $44 million against $2 billion in cash, investors face exceedingly little balance sheet risk.

Investors looking for a juicier yield may prefer ADP competitor -- and fellow Motley Fool Income Investor recommendation -- Paychex (Nasdaq: PAYX  ) . Paychex is a solid business that currently kicks out 4.4%, but I think ADP is the better bet thanks to a more dominant presence and a much safer dividend payout ratio.

Intel (Nasdaq: INTC  )
I may have a better chance of hitting a home run off of Steven Strasburg than I have of fully understanding what makes an Intel chip so great. What I do know for sure, though, is that Intel is the leader in its industry, and continues to beat down perennial underdog AMD (NYSE: AMD  ) .

For Intel, this dominance has meant healthy profits, impressive cash flow, a bulletproof balance sheet, and, of course, a very tasty dividend.

Intel's stock currently yields 3.1% and it has been putting cash in its investors' pockets for nearly two decades. For the decade ending in 2009, dividend growth was particularly impressive, clocking in at an average annual rate of 25%.

In an industry where dividends all too often seem like an afterthought, Intel makes the combination of peanut butter and guacamole sound positively gourmet.

Your turn
If you're looking to diversify your dividend portfolio into tech, I think IBM, ADP, and Intel are great places to start. But I want to know where else you're looking for tech dividends. Scroll down to the comments section below and share your favorite dividend-paying tech stock.

Before you invest in any dividend-paying stock, you should definitely check out the five keys to successful dividend investing.

Intel and Paychex are Motley Fool Inside Value choices. Google is a Motley Fool Rule Breakers recommendation. Apple is a Motley Fool Stock Advisor pick. Automatic Data Processing and Paychex are Motley Fool Income Investor selections. The Fool has created a covered strangle position on Intel. Motley Fool Options has recommended buying calls on Intel. Try any of our Foolish newsletters today, free for 30 days. The Motley Fool has a disclosure policy

Fool contributor Matt Koppenheffer owns shares of ADP and Intel, but does not own shares of any of the other companies mentioned. You can check out what Matt is keeping an eye on by visiting his CAPS portfolio, or you can follow Matt on Twitter @KoppTheFool or on his RSS feed. The Fool’s disclosure policy assures you no Wookiees were harmed in the making of this article.


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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 16, 2010, at 3:05 PM, DBrown7 wrote:

    Matt,

    Nice picks all the way around.

  • Report this Comment On June 16, 2010, at 3:17 PM, DBrown7 wrote:

    One more comment. I think ADP and Paychex will turn out to be particualrly good picks when we look back 5 years from now. The current environment is just about the worst of all worlds for them. With such low interest rates they earn little on their float and of course the high unemployment rate means less payroll business. I think in a few years it will be a much different story on both fronts.

  • Report this Comment On June 16, 2010, at 5:07 PM, TMFKopp wrote:

    @DBrown7

    Thanks for the comments, and I'm 100% with you on ADP. The unemployment issue is pretty obvious, but I don't know that everyone catches on to the impact that low interest rates have on ADP. A recovery in both would mean good times for ADP shareholders (like myself...!).

    Matt

  • Report this Comment On August 18, 2010, at 7:08 PM, nvest7 wrote:

    I recently bought MCHP, which is highly rated by IBD and offers a nice dividend, 4.8%!

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