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Are Dividends Bad News for Tech Stocks?

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Earlier this week, Cisco (Nasdaq: CSCO  ) announced that it would start paying a dividend. With almost $40 billion in cash, Cisco is a money-making machine. So what does the decision to pay a dividend mean for shareholders? Are dividends bad news for tech stocks? I asked Motley Fool Income Investor James Early.

Mac Greer: James, Cisco announced plans to start paying a dividend for the first time. Cisco CEO John Chambers says the annualized yield will be 1% to 2%. Is it a good move for Cisco? Is it a good move for shareholders?

James Early: With almost $40 billion in cash and short-term investments built up, Cisco should have done this five years ago. But better late than never. Yes, it's a great move. Tech stocks were once all about growth, but the industry has matured, and so have many companies. "Tech" is too broad a term now -- we've got high-growth tech and low-growth tech, and it's time for the slow growers to open their pockets.

Greer: OK, James, but according to research by the Bespoke Investment Group, tech stocks in the S&P 500 that pay a dividend have underperformed tech stocks with no dividends over the last one, three, and five years. And it gets worse -- over the last 12 months, dividend-paying tech stocks are only up around 2%, whereas non-dividend-paying tech stocks are up around 21%. Now I know we don't want to mistake correlation for causation, but shouldn't that make Cisco shareholders think twice?

Early: I'm guessing the sample size of tech stocks that a) pay a dividend and b) are in the S&P 500 is fairly small. We also saw a "junk rally" that favored sketchier fare recently. But tech stocks do probably have it rough in that their traditional investor base doesn't favor dividends, and traditional dividend investors don't favor tech stocks. Perceptions will take time to change, so sure, wait a bit if you're hesitant. But Microsoft's (NYSE: MSFT  ) shareholders seem to have accepted it as a payer now, and its 2% yield offsets price volatility. Dividends are safer because they provide part of your return in cash.

Greer: Two of the biggest tech stocks -- Apple (Nasdaq: AAPL  ) and Google (Nasdaq: GOOG  ) -- do not pay a dividend. You recently explained why you think Apple should pay a dividend. Do you think Google should pay one? And who do you think pays a dividend first -- Apple or Google?

Early: Google has $30 billion in cash and Apple has $24 billion. There's no excuse for that, aside from planning a major acquisition. But both companies are large enough that acquisitions are tricky due to antitrust considerations. So why not return the cash? Dividends in the U.S. are set by boards of directors, so it's a toss-up on who goes first. But they should go.

Greer: And is there a dividend-paying tech company that Apple and Google can look to for inspiration?

Early: I'd offer Emerson Electric (NYSE: EMR  ) as an example of tech company -- admittedly hard-goods oriented -- that pays a nice dividend and has beaten the S&P by over 100 percentage points over the past 10 years. That's a pittance relative to what Apple and Google have done, but they're going to slow down, pure and simple.

Microsoft is a Motley Fool Inside Value recommendation. Motley Fool Options has recommended a diagonal call position on Microsoft and buying calls on Intel. Apple is a Stock Advisor selection. Emerson Electric is a Motley Fool Income Investor pick. Neither James nor Mac owns any of the stocks discussed. The Fool has a disclosure policy.

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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 September 18, 2010, at 12:53 AM, rfaramir wrote:


  • Report this Comment On September 20, 2010, at 3:28 PM, mpendragon wrote:

    Tech is about growth in the same way that utilities are about dividends. What Cisco's mountain of cash and dividend plans communicate to the investing public is that they can no longer use their profits to grow aggressively by investing in new products or services or by cannibalizing competitors or makers of compatible products or services. This may not be an accurate picture of Cisco's future but if their stock price stagnates because their growth is limited while their dividends pick up then why not get your dividends from a less risky industry with a higher yield?

    I think Google and Apple are holding back dividends to give the impression that they are still the feisty little tech companies and story stocks they've always been. I also think a lot of their investors like it that way because it keeps the myth going and in an abstract way if I own some of Google then I, by proxy, own some of their cash on hand so it's not as if their hoarding causes me any real harm.

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