Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



How Dividends Change the Game for Cisco Shareholders

Don't let it get away!

Keep track of the stocks that matter to you.

Help yourself with the Fool's FREE and easy new watchlist service today.

The wealth-building power of compound interest will never cease to amaze me. It's a story of patience and attention to detail, where small, short-term differences add up to massive divergence over decades. And in the end, the biggest winners don't always deliver the fattest share-price returns.

Today, we'll take a closer look at a newcomer in the dividends game. Say hello to computer-networking titan Cisco Systems (NASDAQ: CSCO  ) .

Cisco started paying dividends just two years ago, so it can't be considered a true dividend aristocrat for another 28 years. But the quarterly payout has nearly tripled in Cisco's young dividend history, rising from the original $0.06 per share to $0.17 per share today. That most recent dividend will be paid out tomorrow to shareholders on record as of May 8. The policy certainly hit the ground running.

The current 2.9% yield places Cisco shoulder to shoulder with Dow (DJINDICES: ^DJI  ) peers Johnson and Johnson (NYSE: JNJ  ) and JPMorgan Chase (NYSE: JPM  ) , which offer 3% and 2.8% yields, respectively. The trio ranks in the upper half of all Dow yields, with JPMorgan grabbing the 13th spot out of 30 Dow components -- dividend payers, every last one.

Cisco seems set to break away from these two peers via future dividend increases. The networker powers its payouts with just 29% of its trailing earnings, which is among the lowest payout ratios on the Dow. J&J, in stark contrast, funnels 65% of its earnings into dividend checks. The situation doesn't change much if you look at cash flow instead of earnings: J&J spends a meaty 38% of free cash flow on dividend expenses (the Dow's second-highest ratio), while Cisco slides in at a far more comfortable 21%. It's fair to say that Cisco has more headroom for dividend increases than the medical giant does.

JPMorgan's earnings and cash headroom are even loftier than Cisco's, but the megabank remains under the thumb of government regulation. It may be years before JPMorgan is allowed to increase its payouts in any meaningful way, but Cisco can't seem to stop boosting those dividends. So, out of this Dow trio, Cisco is the dividend booster to watch for the next few years.

There's a downside to this dividend bonanza that doesn't get much press, though. Cisco has scaled back its share repurchase program significantly since it started paying dividends in early 2011. Some might say dividends are superior to buybacks because company leaders are seldom great investors. That being said, you should keep this strategy shift in mind before going all-in on Cisco as a long-term income stock.

CSCO Free Cash Flow TTM Chart

CSCO Free Cash Flow TTM data by YCharts.

Once a highflying tech darling, Cisco is now on the radar of value-oriented dividend lovers. Get the lowdown on the routing juggernaut in The Motley Fool's premium report. Click here now to get started.

Read/Post Comments (2) | Recommend This Article (2)

Comments from our Foolish Readers

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 May 23, 2013, at 2:35 PM, andresmitchell wrote:

    Cisco's buybacks have been nothing short of a disaster. They consistently purchased at the wrong time. Every time. So that is a huge positive. It's too hard to time the market. The dividend is not being paid tomorrow. It was paid a month ago.

  • Report this Comment On May 23, 2013, at 2:56 PM, mrkpnl wrote:

    You wrote "

    That most recent dividend will be paid out tomorrow to shareholders on record as of May 8. The policy certainly hit the ground running."

    Hmm, dividend was paid last month (April 23)

Add your comment.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2449926, ~/Articles/ArticleHandler.aspx, 9/25/2016 5:26:00 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated 1 day ago Sponsored by:
DOW 18,261.45 -131.01 -0.71%
S&P 500 2,164.69 -12.49 -0.57%
NASD 5,305.75 -33.78 -0.63%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/23/2016 4:55 PM
^DJI $18261.45 Down -131.01 -0.71%
CSCO $31.34 Down -0.32 -1.01%
Cisco Systems CAPS Rating: ****
JNJ $118.81 Down -0.65 -0.54%
Johnson and Johnso… CAPS Rating: *****
JPM $67.25 Down -0.14 -0.21%
JPMorgan Chase CAPS Rating: ****