You Can Find High Dividend Yields in Surprising Places

It may sound like a surprise, but investors can earn hefty dividend yields from the technology sector.

Bob Ciura
Bob Ciura
Apr 22, 2014 at 8:05PM
Technology and Telecom

It may sound difficult to believe, but the technology sector can be a gold mine for income-seeking investors. Historically, technology stocks haven't been known for dividend payouts. They were more concerned with investing profits back into the businesses through research and development of new products, and making sure they kept up with the ever-evolving technology landscape. Investors were equally uninterested in dividends. The huge capital gains produced in the heyday of the technology bubble trounced the slow-and-steady nature of dividends.

However, in the post-2008 era, all that has changed. Investors are now clamoring for dividends as a source of guaranteed return. That's especially true among technology stocks, where investors have pressured management to show them the money. Here are three technology giants that have responding by showering cash on shareholders.

Payouts that are nothing to sneeze at
Technology companies like Cisco Systems (NASDAQ:CSCO), Intel (NASDAQ:INTC), and Apple (NASDAQ:AAPL) pay dividend yields that are greater than the yield of the overall stock market. In addition, their dividend payouts are actually comparable to bonds right now, as a consequence of such low interest rates.

Cisco and Intel both offer payouts of roughly 3.3%, while Apple's is about 100 basis points lower at 2.3%. Cisco has taken great strides in ratcheting up its dividend in recent years. Prior to 2011, Cisco didn't even pay a dividend. Since then, the company has upped its distribution four times, including its most recent 12% increase.

Intel had an impressive streak of dividend increases until recently, as profits have leveled off as demand for its chips has stagnated. Intel is suffering from the decline in PC shipments, and is trying to save cash by not raising its dividend. To that end, Intel hasn't lifted its payout in over a year.

Apple also hasn't raised its dividend in a full year, which should pave the way for a bump up in a matter of weeks. Apple is due to release its earnings report this week, and investors are expecting a dividend increase.

More than enough cash on hand
The reason these technology stocks can pay generous dividend yields, and afford to raise them from time to time, is their strong free cash flow. Technology companies such as Cisco, Intel, and Apple are huge companies that generate billions of dollars in cash flow. Because they hold very little debt on their balance sheets, they don't need to retain much cash.

Look no further than the payout ratio to determine whether a company can afford its dividend payment. This is a measure that analyzes how much a company earns in profit versus how much it distributes to shareholders. Cisco, Intel, and Apple held payout ratios of 62%, 59%, and 30%, respectively. That means they can still afford to reinvest to grow their businesses, while simultaneously rewarding shareholders with compelling dividends. In fact, Apple's relatively low payout ratio is an indication the company may grant shareholders a sizable dividend increase.

The Foolish takeaway
In today's climate of slow economic growth and record low interest rates, yield is hard to come by. But, that doesn't mean investors can't find suitable sources of investment income. While fixed income yields remain low, stocks are a valuable source of yield. That's true even within the technology sector, which houses many high-yielding stocks.

While it may be shocking to learn that technology companies offer sizable dividends, it's actually stands to reason since technology large-caps have lots of cash on the balance sheets with little debt-to-service and strong cash flows. As a result, if you're an investor looking for yield, look no further than Cisco, Intel, and Apple.