Earlier this week, Cisco
Mac Greer: James, Cisco announced plans to start paying a dividend for the first time. Cisco CEO John Chambers says the annualized yield will be 1% to 2%. Is it a good move for Cisco? Is it a good move for shareholders?
James Early: With almost $40 billion in cash and short-term investments built up, Cisco should have done this five years ago. But better late than never. Yes, it's a great move. Tech stocks were once all about growth, but the industry has matured, and so have many companies. "Tech" is too broad a term now -- we've got high-growth tech and low-growth tech, and it's time for the slow growers to open their pockets.
Greer: OK, James, but according to research by the Bespoke Investment Group, tech stocks in the S&P 500 that pay a dividend have underperformed tech stocks with no dividends over the last one, three, and five years. And it gets worse -- over the last 12 months, dividend-paying tech stocks are only up around 2%, whereas non-dividend-paying tech stocks are up around 21%. Now I know we don't want to mistake correlation for causation, but shouldn't that make Cisco shareholders think twice?
Early: I'm guessing the sample size of tech stocks that a) pay a dividend and b) are in the S&P 500 is fairly small. We also saw a "junk rally" that favored sketchier fare recently. But tech stocks do probably have it rough in that their traditional investor base doesn't favor dividends, and traditional dividend investors don't favor tech stocks. Perceptions will take time to change, so sure, wait a bit if you're hesitant. But Microsoft's
Greer: Two of the biggest tech stocks -- Apple
Early: Google has $30 billion in cash and Apple has $24 billion. There's no excuse for that, aside from planning a major acquisition. But both companies are large enough that acquisitions are tricky due to antitrust considerations. So why not return the cash? Dividends in the U.S. are set by boards of directors, so it's a toss-up on who goes first. But they should go.
Greer: And is there a dividend-paying tech company that Apple and Google can look to for inspiration?
Early: I'd offer Emerson Electric
Microsoft is a Motley Fool Inside Value recommendation. Motley Fool Options has recommended a diagonal call position on Microsoft and buying calls on Intel. Apple is a Stock Advisor selection. Emerson Electric is a Motley Fool Income Investor pick. Neither James nor Mac owns any of the stocks discussed. The Fool has a disclosure policy.