Searching for Dividends? Check Tech

When investors want dividends, the financial, utility, and consumer goods sectors have been the traditional hunting grounds, and for good reason. They are home to S&P 500 Dividend Aristocrats such as Aflac (NYSE:AFL), Coca Cola (NYSE:KO), Consolidated Edison, and Procter & Gamble (NYSE:PG) that have been growing their dividend payments for at least 25 years. Of course, these same hunting grounds are also home to Bank of America, Keycorp, State Street, and others that were forced to dramatically cut their dividends in recent times.

So where should you be looking for future dividend royalty? I would take a closer look at technology. Using the CAPS Screener tool, I found 42 technology sector companies with dividend yields of at least 2.5% that were rated four or five stars by the CAPS community. Here are four examples of well-regarded technology stocks paying out a nice dividend:

In addition to being included in my CAPS screen, the four companies listed above have a few other things in common: (1) They weathered the recent economic turmoil quite well, generating positive earnings in 2008 and 2009; (2) all paid steady or increasing quarterly dividends; (3) all have strong balance sheets.

The technology sector may not have as long a history of paying dividends as other sectors, but it is catching up. For example, Linear Technology has been paying a dividend for the last 18 years, and ADP has already made its way onto the S&P's Dividend Aristocrats list.

While I used dividend yield as a starting point for the screen, investors should perform further due diligence to ensure that juicy yield is secure and will grow. An examination of a stock's payout ratio, free cash flow growth, and balance sheet will be helpful in assessing future prospects for the stock and its dividend.

Interested in specific dividend stock recommendations? Check out Motley Fool Income Investor.

For more on dividend investing, see:

• The Best Undercover Dividends
• 10 Dividend Stocks for the Next Decade and Beyond
• A Wealth-Building Strategy for the Next 10 Years