Technology Dividends of the Future

Historically, the technology sector hasn't been one for paying out huge dividends. Because many of these companies are small and growing, they reinvest their money into their own operations to fund future growth.

Alas, the day will soon be coming when some tech stalwarts will start paying nice dividends. Though these mature companies will likely leave their rule-breaking, 100%-share-appreciation days behind, a future filled with dividends isn't that bad either.

For those who scoff at the power of dividends, you need only read Jeremy Siegel's The Future for Investors. In it, he writes: "Dividends matter a lot. Reinvesting dividends is the critical factor giving the edge to most winning stocks in the long run."

So today, I'm looking at who is offering dividends right now in the tech sector, with the belief that these companies will be the ones consistently offering (and hopefully raising) dividends in the future.

An important metric for dividends
One of the most popular metrics used to measure a dividend's sustainability is the earnings payout ratio. In essence, this measures how much of a company's earnings are used up in paying out dividends. As the theory goes, the lower the payout ratio, the more sustainable the dividend.

Take a look at the table below. It includes seven popular technology stocks and their payout ratios.

Company

Dividend Yield

Earnings Payout Ratio

Corning (NYSE: GLW  ) 1.1% 9%
Cisco (Nasdaq: CSCO  ) 1.5% 5%
InterDigital (Nasdaq: IDCC  ) 1.1% 4%
Cypress (Nasdaq: CY  ) 1.6% 58%
Broadcom (Nasdaq: BRCM  ) 1.1% 17%
Qualcomm (Nasdaq: QCOM  ) 1.5% 33%
Tellabs (Nasdaq: TLAB  ) 1.9% 36%

Source: Yahoo! Finance.

In their book Million Dollar Portfolio, David and Tom Gardner suggest that you should only hold stocks that have a payout ratio of less than 65%. None of these stocks are in danger of paying out too much from earnings.

But wait, there's more!
This is where things get tricky. Because earnings are reported using the accrual method, all of the money that a company says it's earned hasn't necessarily been paid to it yet. Things like accounts receivable and payable, depreciation, and goodwill are included in earnings -- and they don't immediately affect the amount of money a company has in the bank.

The good news is that there is in fact a way to check how much money a company has put in the bank: free cash flow. This number is very (some Fools say more) important in evaluating a company's dividend sustainability. In the end, dividends are paid from free cash flow, not from earnings.

Check out the free cash flow payout ratio for these companies.

Company

FCF Payout Ratio

Corning 13%
Cisco 14%
InterDigital 36%
Cypress 28%
Broadcom 13%
Qualcomm 36%
Tellabs 35%

Source: Yahoo! Finance. TTM dividends used when possible, otherwise future dividend payouts were used.

Though some numbers changed marginally, this shows that these tech dividends are clearly healthy.

Dividend growth
The flip side of this, of course, is that the dividend yields for these companies are relatively low. Again, this is largely because the technology sector is still in the early stages of paying out dividends.

The good news is that this means there's a long runway for dividend growth in the future. When companies like Broadcom, Cisco, and Corning are paying out dividends that account for less than 15% of free cash flow, it tells you they will be able to raise those dividends considerably when the time comes.

Foolish takeaway
If you're looking for some dividend ideas, consider these names from a free report from Motley Fool's expert analysts called "13 High-Yielding Stocks to Buy Today," including one named by a senior retail analyst as "the dividend play of a lifetime." Tens of thousands have requested access to this report, and today I invite you to download it at no cost. To get instant access to the name of these 13 high yielders, simply click here -- it's free.

Fool contributor Brian Stoffeldoes not own shares in any company mentioned. The Motley Fool owns shares of Qualcomm. The Fool has created a bull call spread position on Cisco Systems. Motley Fool newsletter services have recommended buying shares of Cisco Systems, Cypress Semiconductor, and InterDigital. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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