Given the paltry yields on savings and high-quality bonds, it's easy to see why dividend stocks are getting more attention these days. Though dividend-paying stocks have a much different risk profile from CDs or Treasuries, a well-diversified portfolio of quality dividend stocks can help boost your current income and provide income growth potential through dividend increases.
Not just any dividend-paying stocks will do, however, and it's important to take a holistic approach to evaluating these opportunities. That's one reason that last year I created the Dividend Report Card, which looks at metrics such as dividend history, payout ratios, and interest coverage to determine the sustainability and growth potential of a company's dividend.
Today, I'd like to take a bird's-eye view of dividend health at the sector level and take a gander at technology stocks.
Sector overview
When you think "technology stocks," dividends probably aren't the first thing that pops into your mind. And although many younger tech stocks don't pay a dividend, a number of older ones have smartly realized that they are no longer the triple-digit-annual-growth companies they may have been in the 1990s and have begun paying more meaningful dividends.
What's more, some of these new dividend-paying tech stocks are veritable cash cows, with strong balance sheets and plenty of room left to grow. Put simply, dividend-paying tech stocks should be on every income-minded investor's radar.
A closer look
The most important factor when considering the health of a company's dividend is the free cash flow payout ratio. In other words, you want to make sure a company has enough extra cash left over after reinvesting in the business to fund the dividend.
Let's take a look at the free cash flow payout ratios of some of the sector's top-yielding stocks.
|
Company |
Yield |
Free Cash Flow Payout Ratio |
|---|---|---|
| Paychex (Nasdaq: PAYX) | 3.9% | 89% |
| Intel (Nasdaq: INTC) | 3.7% | 38% |
| Molex (Nasdaq: MOLX) | 3.0% | 94% |
| Linear Technology (Nasdaq: LLTC) | 2.9% | 50% |
| Automatic Data Processing (Nasdaq: ADP) | 2.7% | 46% |
| Microsoft (Nasdaq: MSFT) | 2.7% | 24% |
| Analog Devices (NYSE: ADI) | 2.5% | 31% |
Data provided by Capital IQ, a division of Standard & Poor's, as of May 27. FCF = net income depreciation - capital expenditures - change in net working capital.
Foolish bottom line
The results of this quick screen are promising, but it's worth noting that this free cash flow calculation does not include cash acquisitions, an activity in which some technology companies frequently partake. Before investing in any of these companies, it's important to take that fact into consideration.
These yields may not knock anyone's socks off, but with the S&P 500 yielding about 1.9%, dividend-paying tech stocks like these are worth further research.
Looking for more dividend ideas? Check out our free report " 13 High-Yielding Stocks to Buy Today ."
