One time-tested way to beat the S&P 500 is to buy and hold the dividend-growing stocks trading on its index. Historically, dividend-paying companies in the index outperformed their peers, with the dividend-raisers of the group doing even better. As we continue to jostle around in this bear market, it may be wise for investors to remember this past outperformance and start adding passive income generators to their portfolios.
Three such tech-facing companies are Microsoft (MSFT -1.27%), HP (HPQ 0.69%), and Texas Instruments (TXN -2.44%). Not only did they grow their dividends by 17, 11, and 17 consecutive years, respectively, they each managed dividend growth rates of 10% or higher over the last five years.
Aside from their promising passive income potential, let's investigate what makes these three businesses such attractive investments.
1. Microsoft: 1.1% dividend yield, 27% payout ratio
Operating as a modern-day tech conglomerate, Microsoft and its $1.7 trillion market capitalization may be one of the steadiest growth companies in the world. Despite its size, Microsoft managed to average 15% sales growth annually over the last five years, riding its intelligent cloud segment's astonishing rise.
This cloud unit (Azure) recorded over $20 billion in sales in the first quarter of 2023, quadrupling its figures from Q1 of 2015. Now accounting for over 40% of the company's revenue, its hybrid cloud offerings allow customers to do more with less, benefiting from Microsoft's global data center presence and end-to-end security solutions.
After its release in 2010, Azure helped Microsoft's stock price increase tenfold before dropping in 2022 due to decelerating growth rates, challenging market conditions, and foreign exchange impacts.
While the market has been disappointed with the company's results, Microsoft managed 11% revenue growth year over year in its most recent quarter. Led by a 14% increase in Office 365 customers and LinkedIn growing sales by 17%, the company's productivity and business processes segment remained as strong as ever.
In its "more personal computing" segment, Microsoft saw 15% and 3% declines year over year from its Windows OEM (original equipment manufacturer) and Xbox divisions, respectively, as the computing market continued deteriorating and gaming engagement dipped. However, with its acquisition of Activision Blizzard set to finalize in 2023 and its new advertising partnership with Netflix, this segment could offer vastly increased growth in the coming years.
Down 35% in 2022, Microsoft stock looks attractively valued, considering its growth optionality.
MSFT PE Ratio data by YCharts
With its price-to-earnings ratio now well below its three-year average and its dividend yield above its mean over the same time, Microsoft's growth comes at a fair price. Moreover, with a payout ratio of just 27%, the company has ample room to continue raising its 1.1% dividend, making it a tremendous buy-and-forget-about investment.
2. HP: 3.8% dividend yield, 16% payout ratio
While printing and personal computers (PCs) may be viewed as technological commodities anymore, HP has nonetheless carved out a profitable niche in the space, owning a 19% share of the PC market. Operating with two business segments (personal systems and printing), HP recorded nearly $15 billion in sales during the third quarter of 2022, with the units accounting for 69% and 31% of revenue, respectively. Generating 57% of the company's operating profit, despite being the smaller line sales-wise, printing has helped HP record four-bagger total returns over the last decade.
Though HP's days as a growth stock are gone, it averaged 5% annual revenue growth over the last five years. Furthermore, the company generated an average free cash flow of $4.2 billion annually over the same time, most of which is returned to shareholders in share repurchases.
HPQ Free Cash Flow data by YCharts
HP eliminated 39% of its total outstanding shares through these buybacks in the last five years. Better yet for investors, these repurchases were done at relatively low prices on a price-to-free-cash-flow (P/FCF) basis.
HPQ Price to Free Cash Flow data by YCharts
Thanks to this low valuation, these buybacks led to HP's free cash flow per share more than tripling its free cash flow -- juicing returns to shareholders. Rounding out its cash returns, the company increased its dividend for 11 straight years, paying a 3.8% dividend with a 17% payout ratio, underscoring a long growth runway for its payments.
Trading at 7 times free cash flow, HP is priced for no growth. However, this valuation will help its share buybacks drive strong returns for investors as it integrates its $3.3 billion acquisition of Poly and benefits from the growing hybrid work transformation.
3. Texas Instruments: 2.9% dividend yield, 47% payout ratio
Texas Instruments (TI) builds semiconductors for electronics developers and manufacturers through its two core business segments: analog and embedded processing, which account for 77% and 17% of total revenue, respectively. Owning a vast portfolio of over 80,000 products that are critical to the electronics industry, its industrial, automotive, and personal electronics end markets accounted for roughly 86% of total sales in 2021.
Thanks to this diversified suite of semiconductor chips and electrical components, TI's stock rose over 600% over the last decade with the rise of manufacturing automation and the explosion in electronics.
Helping to drive these strong total returns is TI's track record of returning cash to shareholders.
TXN Shares Outstanding data by YCharts
In the last decade, TI's dividends paid are up over 500% and its shares outstanding are down 18%, showing that the company continues to put its growing FCF generation to work.
TXN Free Cash Flow data by YCharts
This FCF is all the more impressive considering TI spent $3.1 billion in capital expenditures over the last year as it builds three new fabs in Texas and Utah to boost manufacturing capacity.
TXN Free Cash Flow data by YCharts
Trading at just 17 times this cash from operations, Texas Instruments' 2.9% dividend, manageable payout ratio, steady buybacks, and importance to the semiconductor industry make it a great core holding for any portfolio.
