When companies reach a level of cash generation where they can't find enough things in-house to invest in, they tend to do one of two things with it: Pay out a dividend to shareholders or buy back stock in the company. Over the last few decades, dividends have taken a back seat to share repurchases for many companies and it's become harder to find dividend-paying stocks. But adding dividend-paying stocks to an investment portfolio can have a tremendous impact on long-term returns. For example, since the 1940s, dividends have accounted for 40% of the stock market's total return to shareholders.
It literally pays to buy and hold great dividend stocks. Two gems in the tech sector that have very shareholder-friendly capital return programs are HP (HPQ 1.55%) (formerly Hewlett-Packard) and Texas Instruments (TXN 5.64%). These stocks pay above-average yields and are outperforming the market in 2022, which can be a perk of owning dividend stocks during bear markets. Let's find out a bit more about these two dividend-paying tech stocks.
1. HP
HP has been getting some attention recently as Warren Buffett's Berkshire Hathaway disclosed a $3.8 billion stake in the personal computer brand for the first quarter. While HP faces headwinds in the near term with declining PC sales, and the shift toward mobile computing and digital document services, the company's computing and printing solutions are still heavily used by many individuals and businesses around the world. That means the company can produce stable revenue and profits every year, which are two key ingredients of a great dividend stock.
Over the last five years, HP has increased its dividend payments by 70%. It currently pays an above-average dividend yield of 2.96%, which is funded completely through free cash flow. In fact, HP has returned all its free cash flow to shareholders through share repurchases and dividends over the last two years.
Investors that see HP as a slow-growing business past its prime would be missing out on a gem. The stock has significantly outperformed the broader market during the bear market, with HP shares down 10% year to date compared to a 21% decline for the S&P 500. Management is allocating capital to areas that should keep revenue and profit margins up, such as premium gaming PCs, subscription printing services, and videoconferencing tools.
Analysts expect HP to hold annual revenue stable at around $66 billion over the next three years, while earnings per share slowly climb higher at a compound annual rate of 7.2%. Those expectations make the stock's dividend yield and low price-to-earnings ratio of 6 look very attractive.
2. Texas Instruments
Texas Instruments is not just the maker of your high school calculator. The company has been around for 92 years and makes analog and embedded processors for a range of applications spanning electric toothbrushes to the automotive markets.
The company's long operating history suggests a durable competitive advantage at work here. TI's strength is in manufacturing highly specialized components at low cost, and this has translated to steady growth over the years. Assuming shareholders opted to reinvest their dividends, they would have earned a return of 604% over the last 10 years, outperforming the S&P 500's return of 239%.
The combination of good growth prospects, as industries become increasingly computerized, and rising dividends makes Texas Instruments one of the best dividend stocks, period. Management runs the company to maximize the long-term growth of free cash flow on per-share basis and pay dividends to shareholders. That approach has led to 18 consecutive years of dividend increases, while free cash flow per share has increased at a compound annual rate of 12% since 2004.
No matter what the economy throws at Texas Instruments, it's a good bet it will keep on chugging along as it always has. Meanwhile, the shares have an attractive dividend yield of 2.95% at the time of writing, with most of its free cash flow distributed as dividends over the last year. Simply put, you would be hard-pressed to find a better dividend-paying tech stock than Texas Instruments.
