The tech sector is getting a much-needed haircut right now. Many of these stocks really needed a trim. By the middle of February, the tech-heavy Nasdaq Composite index had gained 44% in 52 weeks. These massive gains left the S&P 500 and Dow Jones Industrial Average benchmarks far behind:
It's true that a handful of tech stocks had earned their stripes the hard way, winning more business in an unprecedented age of online shopping, online work, online schooling, and more. Even so, the proverbial corner of Wall Street and Silicon Valley was getting overheated. A few disappointing earnings reports and economy-stabilizing events later, the Nasdaq index has dropped 10% lower in three weeks. This may not be the bottom of this correction but it's time to start taking tech stocks seriously as a value investment again. On that note, here are three tech stocks that combine high-octane growth with compelling dividend policies -- and they look like solid buys in early March.
Dutch-Texan microchip maker NXP Semiconductors (NXPI 1.71%) has pulled back 11% from mid-February's all-time highs. The reversal started when NXP closed down two manufacturing plants near Austin, Texas due to storm-related power outages.
Discounted share prices boosted NXP's effective dividend yield, and the company also took direct action to increase the stock's appeal to dividend investors. Last week, the quarterly payouts were raised by 50%. NXP's dividend yield now stands at a respectable 1.3%, and the company is still funneling just 30% of its free cash flows into dividend payments.
As a deeply entrenched leader in the automotive computing market, NXP should be able to keep its growth engines running for many years to come. The solid dividend checks are icing on the cake, and I expect the payout increases to keep coming as the company's cash flow grows larger. Buying NXP shares during a short-lived dip should set you up for tremendous stock returns with a side of bountiful dividend payments.
Most investors don't think of Universal Display (OLED 4.11%) as a dividend stock. The researcher behind the phosphorous organic light-emitting diodes (PhOLED) you see in smartphone and tablet screens everywhere sent out its first dividend check just four years ago and the effective yield stops at a modest 0.4%. Many income investors would laugh at these numbers and move on to a higher-yielding idea.
That's a big mistake.
Universal Display's management sees the dividend as a sign of the company's strong business prospects. Here's how CFO Sid Rosenblatt explained it in last month's fourth-quarter earnings call. The company had just crushed Wall Street's estimates across the board and raised its payout by 33%.
"The dividend increase reflects the confidence in our robust future growth opportunities, expected continued positive cash flow generation and commitment to return capital to our shareholders," Rosenblatt said.
The psychology of dividend payments can be an important factor. There's no law or regulation that requires dividend payers to raise their payouts year by year, but that doesn't stop a few standouts from becoming Dividend Aristocrats with more than three decades of uninterrupted dividend increases. Just as the Aristocrats can point to their long dividend-raising streaks as selling points for prospective investors, Universal Display can argue that its shareholder-friendly cash returns prove the company's financial stability and bright growth prospects.
The coronavirus pandemic slammed the brakes on Universal Display's long-term growth last year but the company has many balls in the air. Between a return to normal smartphone and tablet sales, big-screen PhOLED television sets are entering the consumer mainstream and OLED-based lighting panels are coming up next. Manufacturing partners are ramping up next-generation panel-building facilities as we speak, specifically geared toward the large TV and lighting panels. At the same time, Universal Display is developing additional pieces of the PhOLED puzzle, hoping to add blue elements and more host materials to today's palette of mostly red and green color elements. Brand new partners are building PhOLED factories in China, expanding Universal Display's presence in the Middle Kingdom.
The dividend is supposed to remind investors of all that, and I expect the annual increases to continue for many years. That commitment to growing payouts is crucial. If you bought Universal Display shares four years ago, on the day of the first dividend announcement, the yield at the time stopped at a minuscule 0.2%. Against the same cost basis, the current dividend policy yields a more respectable 1.2%.
The effective yields will only rise over time, and Universal Display's stock trades 19% below February's highs. You should take advantage of that huge rebate.
Mobile processor and communications chip leader Qualcomm (QCOM 3.65%) has more experience with dividend payouts. The quarterly checks started coming in 2003, rising from $0.05 to $0.065 per quarter in 18 years. This simple chart is a thing of beauty:
The stock gained 590% over the same period. Qualcomm's dividend yield is 2% today and I fully expect another boost to take effect in the upcoming June payout. At the same time, Qualcomm's shares have dropped 23% below last month's all-time highs. The stock is downright affordable at $21 times trailing earnings and 5 times sales.
Qualcomm's cash machine is humming on every cylinder, led by rising interest in the Internet of Things and global installations of 5G wireless networks. In both of these explosive growth markets, Qualcomm's chips can be found in both the end-user's device and in the infrastructure equipment. Once again, you're getting a serious dividend on top of a fantastic growth stock, all at a significant discount from recently overheated prices.