In many investors' minds, the terms "tech" and "dividend" are like oil and water. However, as you'll see, many of the sector's largest names have grown their dominant technology businesses into powerful payout machines in the years since the Tech Bubble.
A panel of Motley Fool contributors has compiled a list of their favorite dividend stocks in the tech sector. For over a decade, PC software giant Microsoft (NASDAQ:MSFT) has leveraged its high-margin software businesses to generate substantial payouts and income growth for its shareholders. Although newer to dividend payments than Microsoft, smartphone and tablet behemoth Apple (NASDAQ:AAPL) has incredible profits that position the Mac maker to grow its cash payouts well into the future. And semiconductor stalwart Intel (NASDAQ:INTC) offers market-beating yield and an enviable track record of dividend payments.
This primer offers a snapshot of each company's dividend profile. You'll want to dive deeper to better understand the specific benefits and risks for these companies before deciding to invest, but use our Foolish insight as a jumping-off point.
Andrew Tonner (Microsoft): Since it began paying its regular quarterly dividend in 2004, software giant Microsoft has been one of the most powerful income-producing stocks in all of tech.
Microsoft's current 3.3% dividend yield sits 50% higher than the current 2.2% yield for the broader market. Just as importantly, Microsoft maintains a strong commitment to growing its payouts. Since its inception, Microsoft has increased its dividend at an average annual rate of 13.1% and grown its cash distribution in every year except 2009, in the throes of the credit crisis. Microsoft also enjoys ample financial flexibility in terms of its ability to maintain and grow payouts. The company carries in excess of $100 billion in cash and liquid investments on its balance sheet, versus roughly $35 billion in short- and long-term debt.
Concerns do exist over the long-term viability of some of Microsoft's legacy software businesses against the rise of Google's Android OS and Apple's iOS. However, Microsoft took active steps to counter these threats by making its Windows 10 software upgrade free to most of its installed base earlier this year. Other areas, such as cloud computing, also continue to exhibit impressive growth, and any decline in either Windows or Office will take years, or even decades, to fully unfold. For investors seeking yield and income growth today, Microsoft appears to check all the boxes.
Brian Stoffel (Apple): Avid dividend investors might scoff at a stock yielding just 1.8%. But if you're looking for great dividends in the tech sector, Apple's is hard to beat.
Savvy investors who bought Apple when it announced its first post-Steve Jobs dividend in March 2012 already enjoy a 2.5% annual yield on their initial investment. And that's because of two key factors: The company has tons of free cash flow, and it's been raising its dividend ever since.
Free cash flow is the lifeblood of any dividend payer. Not only is Apple's free cash flow prodigious, but also the dividend payout over the past year has eaten up only 16% of free cash flow.
This situation means not only that Apple's dividend is eminently safe, but also that there's enormous potential for growth in the dividend. In the three short years the company has offered its dividend, it has grown at a rate of 11% per year.
Combine that with the fact that Apple's stock currently trades for just 13 times trailing earnings and 9 times free cash flow, and you have a recipe for an excellent dividend stock.
Dan Caplinger (Intel): It's rare to get a chance to buy a solid blue-chip stock at a cheap valuation with a healthy dividend yield, but that's exactly what Intel (NASDAQ:INTC) is offering right now. The chip giant has gone through plenty of turmoil in recent years, but it appears to be getting its act together and has consistently rewarded its shareholders with growing quarterly payouts over time.
The primary concern that investors have about Intel is that it hasn't been overly successful in translating its dominance in the PC arena into similar leadership in the mobile-device industry. The company has lost billions of dollars in its mobile efforts, but the long-term advantage that Intel may have will develop with its top-of-the-line manufacturing processes, with the ability to drive smaller designs than rival foundries. That could in turn create opportunities to surpass rivals in terms of speed and performance, allowing it to wrest the initiative back from some of its competitors.
Intel's sluggishness has justifiably held its share price back, but things are starting to look up for the company. With a better than 3% yield and an earnings multiple of just 13, Intel is worth a closer look for dividend investors.
Andrew Tonner owns shares of AAPL. Brian Stoffel owns shares of AAPL, GOOG, and GOOGL. Dan Caplinger owns shares of AAPL and GOOG. The Motley Fool owns shares of and recommends AAPL, GOOG, and GOOGL. The Motley Fool owns shares of Microsoft. The Motley Fool recommends INTC.
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