Though dividends are more associated with growth companies, the tech industry has seen a number of its largest players become dividend dynamos in recent decades.
Powered by cash-cow business models, mature information-technology names such as Apple (NASDAQ:AAPL) and Cisco Systems (NASDAQ:CSCO) offer income investors compelling mixes of historical cash distributions, current yield, and dividend growth potential. These two aren't the only appealing dividend opportunities in the sector, but let's see what makes them some of the more compelling dividend stocks in IT today.
The world's largest technology company has had a capital-return program only since 2012, but its potential for sustained dividend growth is perhaps the most impressive in its industry.
The key to Apple's dividend potential lies in its high-margin products, including the iPhone, iPad, and Mac. Consider, for example, that research firm Strategy Analytics recently estimated that Apple captured 79.2% of the operating profit in the global smartphone industry in 2016. That means massive cash flows for the Mac maker, and it's part of the reason Apple has accumulated a mind-boggling $158 billion in net cash as of its most recent quarterly report.
Moreover, the launch of the highly anticipated iPhone 8 later this year is likely to trigger an upgrade cycle that should drive record earnings and further fill Apple's coffers. Potential moves into massive global markets, including healthcare, augmented reality, virtual reality, and smart homes, should serve as future catalysts to drive sustained growth for Apple.
So while Apple's shares yield just 1.48% today, the company's winning business model, strong leadership, and globally recognizable brand should facilitate consistent dividend growth for investors well into the future.
Paying much more than Apple shares today, router giant Cisco Systems stands well above the S&P 500's 1.9% current yield, with its 3.4% showing. Like the Mac maker, Cisco is in the early stages of its dividend history, but its initial progress has been impressive.
Since initiating its cash distributions in 2011, Cisco has raised its annual dividends per share from a $0.24 starting point to $1.04 last year. That progress translates into a compound average growth rate of 28% per annum. The company already increased its quarterly dividend for 2017 by $0.03 per share to $0.29, further extending the company's perfect streak of consecutive annual increases.
Better still, all signs suggest that Cisco will be able to maintain its impressive dividend performance in future years. Cisco's payout ratio currently stands at 54% of net income, and it carries $35.5 billion in net cash on its balance sheet. Those stats alone suggest that Cisco can continue to increase its dividend payments for many years.
Being at the heart of one of tech's largest trends should also drive Cisco's results higher in the years to come. Its routers make it a likely beneficiary of the continued rise of the Internet of Things, which the company has estimated should develop into a $19 trillion market over the next 10 years.
But even if that estimate proves to be too optimistic, Cisco has enough going for it that it should still be able to support sustainable dividend growth over the long term.