Profit From the New Tech Stock Paradigm

Investors should look to gain from change, not fear it. Tech stocks such as Microsoft (Nasdaq: MSFT  ) and Intel (Nasdaq: INTC  ) were once the darlings of the growth stock world, but no more. The same looks increasingly true of Apple (Nasdaq: AAPL  ) . But that does not mean investors cannot benefit from the dividend income of each.

It used to be that tech companies did not pay dividends, as management contended that surplus cash was better used for research and development or mergers and acquisitions. To the benefit of the shareholders of Microsoft, Intel and Apple, that is no longer the case. Microsoft and Intel pay dividends that beat not only the 2% S&P 500 average, but also those paid by traditional income stocks such as utility companies -- and income up-and-comer Apple isn't far behind.

How does the dividend compare?
There are four aspects for investors to consider regarding a company's dividend: how sustainable it is, how competitive it is, how much it has grown, and how much it can be increased in the future. As the table below shows, tech companies such as Intel, Microsoft, and Apple compare very favorably with dividend-paying utilities in those critical areas.

Company

Dividend Yield

Dividend Payout Ratio

5-Year Dividend Growth Rate

Intel

4.1%

37%

12.68%

Microsoft

3.3%

43%

13.18%

Apple

1.8%

23.5%

N/A*

El Paso Electric (NYSE: EE  )

3%

38%

N/A*

Wisconsin Energy (NYSE: WEC  )

3.2%

49%

17.9%

OGE Energy (NYSE: OGE  )

2.7%

44%

2.32%

Utility industry average

3.8%

60%

0.63%

Source: Motley Fools CAPS. *Both Apple and El Paso Electric recently resumed dividend payments.

What about the future for the dividend?
Investors buy for the future, which makes the potential growth for the dividends of Apple, Intel, and Microsoft even more alluring. Each has a much lower payout ratio than the utility industry average. The five-year dividend growth rate for Intel and Microsoft is also much more promising for shareholders. The following table reveals how much more profitable techs are than utility stocks. Microsoft, Intel, and Apple also have more robust cash flow and much less debt. That generates the funds to finance future dividend growth.

Company

5-Year Average Net Profit Margin

Debt-to-Equity Ratio

Price-to-Cash-Flow Ratio

Intel

19.7%

0.15

5.7

Microsoft

28%

0.17

19.7

Apple

20.7%

0%

13.2

El Paso Electric

9.1%

1.23

6.2

Wisconsin Energy

9.6%

1.26

9.8

OGE Energy

7.5

1.28

8.3

Utility industry average

6.7%

1.06

7.3

Source: Motley Fools CAPS.

But I thought techs were growth stocks?!
The dividend income from Intel, Microsoft, and Apple is even more important due to the recent performances of each of these techs. The growth rates of each have plummeted. They're all fine companies, but for Foolish investors, their dividend growth rate is looking much better than their earnings-per-share and sales growth. The trend in EPS growth is also bearish for the broader tech industry; in the most recent quarter it has plunged from the five-year average due to a decline in demand resulting from slumping economic growth around the world.

Company

EPS Growth Rate, Most Recent Quarter

EPS Growth Rate, 5-Year Average

Sales Growth Rate

Intel

(14.3%)

18.35%

8.17%

Microsoft

5.74%

11.92%

5.75%

Apple

20.7%

60.16%

43.09%

Tech industry average

11.56%

35.79%

3.38%

Source: Motley Fool CAPS.

Why not have growth and income!
Despite the bearish EPS trajectory, Intel, Microsoft, and Apple all have appealing net profit margins. Healthy profits will ultimately result in a robust total return for the shareholders, due to the gains from the rising share price and the dividend income received. From the strong cash flow and the manageable payout ratio of each, the dividend yield should continue to grow, lifting the total return of these three stocks even higher than that of utility stocks and other traditional income securities.

Jonathan Yates has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple, Intel, and Microsoft. Motley Fool newsletter services recommend Apple, Intel, and Microsoft. 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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