There are many exciting tech stocks that offer investors the chance to piggyback on explosive growth opportunities. But the world of technology changes fast, and competition is intense. One way to ensure you're investing in a company that is built to last is to look for ones that pay regular dividends.
The dividend is a sign of financial strength. Usually, companies that pay regular dividends have consistently reported profits for years. It's also a reflection of management's confidence in the future.
To give you some ideas, let's dig into two of my favorite dividend tech stocks right now: TE Connectivity (TEL -0.71%) and Apple (AAPL -0.57%).
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1. TE Connectivity
TE Connectivity provides all the boring stuff that makes data centers, electric vehicles, and communications equipment function. We're talking connectors, sensors, transformers, jacks and plugs, cables, and other components that the company sells into a variety of markets. In 2021, transportation equipment made up 60% of revenue, with industrial products making up 26%, and communications supplies accounting for 14% of the business. Lately, fast-growing markets like 5G, connected homes, and cloud computing have created new opportunities for the company.
The stock is down 25% from its recent high, but this doesn't reflect the company's performance. Sales grew 8% year over year last quarter, with adjusted earnings per share up 20%.
The only negative was the transportation business, where sales declined 15% over the year-ago quarter. This was due to softness in auto production, but management characterized demand as healthy across each segment overall.
Long term, management is optimistic about the opportunities to offer products for electric vehicles, factory automation, and cloud applications. In other words, TE Connectivity's future is safe. As various industries become more digitized, the company's relationships with its customers can help it identify certain technological trends where it can capitalize.
What stands out with this business is a 10-year record of gradually improving operating margin and free cash flow, the hallmarks of a resilient business. It paid out 35% of its free cash flow last year in dividends. That brings the current dividend yield to 1.62%, which is not high, but it's above the S&P 500 average of 1.33%.
At a forward price-to-earnings ratio of 17, this tech stock offers good value relative to the market average, where the S&P index trades at a forward multiple of 19.4. It's an under-the-radar tech stock that offers long-term upside while paying you some income along the way.
2. Apple
Apple possesses an enviable brand, selling a product that its customers keep with them throughout the day. There are many top consumer brands that would love to say that. "People expect Apple to solve hard problems with easy-to-use products," CEO Tim Cook said during the fiscal first-quarter earnings call. "And iPhone has never been more popular."
Indeed, Apple is rolling right now, as consumers upgrade to 5G. Revenue hit a record $123.9 billion during the December quarter. With the recent launch of the new budget-friendly iPhone SE in March, revenue should remain strong in the near term. The stock has returned 28% over the last year when many tech stocks have underperformed.
Apple's dividend yield is below average, currently sitting at only 0.52%. But investors should value it just as highly as TE Connectivity's. Over the last five years, Apple has raised the dividend by 48% compared to 31% for TE Connectivity.
The reason Apple's yield is low is primarily because the company only paid out 14% of its free cash flow last year. But the low payout also means it has ample room to increase the dividend. Plus, the company is sitting on a mountain of cash to fund more capital returns to shareholders. It had $85 billion of net cash on the balance sheet at the end of December.
It's very likely Apple will at least double its quarterly dividend payment over the next 10 years. So investors who buy today could be earning a dividend yield of around 1% on their original cost basis by 2032. That's the fun of owning dividend growth stocks.
