3 Tech Companies With Surprisingly Strong Dividends

In this yield-starved environment, here are three technology companies investors should consider.

Aug 25, 2014 at 12:00PM

Last Friday, Fed Chief Janet Yellen took the stage at Jackson Hole, Wyoming to discuss central bank policy. In an eagerly anticipated press conference, she admitted that the jobs situation was improving, but resisted calls to tighten monetary policy. Citing continued slack in the labor markets and the sluggish pace of wage growth, the head banker resisted calls to raise interest rates.

For yield-hungry investors, the hunt continues. Since the "Great Recession" started in 2008, the Federal Reserve has pushed interest rates down to zero. Bond rates, CDs, and savings accounts quickly followed, forcing income investors to look for new places for yield. And believe it or not, technology is one area where many investors are looking.

Firms like Apple (NASDAQ:AAPL), Microsoft (NASDAQ:MSFT), and Intel (NASDAQ:INTC) are providing investors with both surprisingly strong dividends, and capital appreciation to boot.

The newcomer: Apple
Apple's a relative newcomer to income investors. It found its way back to the income investor world by reestablishing a dividend it ended in the mid-90s. Tim Cook, after taking the reins from Steve Jobs, decided to reverse Jobs' aversion to giving cash back to shareholders by paying its first dividend of roughly $0.38 per share.

In the next two years, the company has raised that to $0.47 per share pre-split, good for an 11.4% increase per year. And right now, the investment yields 2.1% as compared to a 10-year U.S. Treasury that yields 2.4%. When one considers the favorable tax rates that dividends are subject to, on a tax-adjusted basis, Apple presents a higher after-tax yield for many investors.

Obviously, investors want sustainable dividends because dividends can be reduced or discontinued more easily than bonds; but it appears Apple is solid here, as well. Although much has been made of its huge cash pile -- now approaching $164 billion -- and while Apple bears argue that the company's cash is "locked overseas," it simply isn't true.

If the company wants to pay dividends, it can repatriate cash to pay for any future increases. Yes, the company would have to pay the full tax rate of 35% to do so, but considering its effective tax rate last year was 26.2%, it isn't a stretch to think the company couldn't bring back cash to pay its dividend.

Microsoft's high yield
Microsoft is another high-yielding tech investment, currently yielding approximately 2.7%. During the last two years, the company has been good to income investors by raising its dividend 40%, from $0.20 per share to $0.28 per share.

Microsoft is in the midst of a turnaround. While the company is still dependent on the licensing of its software  -- Microsoft Windows and Office products -- new CEO Satya Nadella is focusing on transitioning the company to a "devices and services" operation. And while transitions are tricky, income investors can rest assured that Microsoft's free cash flow can support its dividend. As a matter of fact, last year, its free-cash-flow payout ratio came in only at 33%.

And now for Microsoft's partner
In a way, it seems natural for Intel to make the list. After all, it's been tethered to Microsoft for nearly three decades by forming the powerful Wintel monopoly. With Microsoft manufacturing the operating system, Intel providing the chips, and various OEMs providing the hardware, this partnership essentially cornered the PC market during the 90s. However, both companies are far from their all-time highs, as they essentially missed the mobile revolution.

However, for income investors, this is a true opportunity. Intel yields roughly 3% and shares have returned nearly 60% in the last year. CEO Brian Krzanich is relentlessly focused on mobile – and so far, it appears the company is making headway there. After an aggressive promise to get into 40 million tablets by year's end, the company appears to be in nearly 15 million devices at the midpoint of the year.

Final thoughts
As investors continue to hunt for income in this yield-starved environment, they must look at unconventional investments. Although technology is considered mostly a growth area, many investments in the sector are high-yielding when compared to U.S. Treasuries.

In addition, these tech companies have the potential for capital appreciation; during the last year, Apple, Microsoft, and Intel are up more than 40%. Yield investors would be wise to look into these three companies going forward.

Here's how Apple will continue to pay that dividend
Apple recently recruited a secret-development "dream team" to guarantee its newest smart device was kept hidden from the public for as long as possible. But the secret is out, and some early viewers are claiming its everyday impact could trump the iPod, iPhone, and the iPad. In fact, ABI Research predicts 485 million of this type of device will be sold per year. But one small company makes Apple's gadget possible. And its stock price has nearly unlimited room to run for early in-the-know investors. To be one of them, and see Apple's newest smart gizmo, just click here!

Jamal Carnette has no position in any stocks mentioned. The Motley Fool recommends Apple and Intel. The Motley Fool owns shares of 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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