Networking giant Cisco Systems (NASDAQ:CSCO) only began paying a dividend in 2011, but the stock has quickly become one of the most attractive tech dividend stocks available. Currently, Cisco yields about 3.1% based on its most-recent quarterly dividend payment, well above the meager 2% yield offered by the S&P 500.
Along with offering a high yield, Cisco has the potential to grow its dividend significantly in the coming years. The company is dominant in its core business, selling switching and routing hardware, and fast-growing markets like cybersecurity should drive growth for years to come.
An attractive dividend stock
Cisco's quarterly dividend now sits at $0.21 per share, or $0.84 on an annualized basis, more than triple the initial quarterly dividend of $0.06 per share in early 2011. In total, Cisco has paid out about $4.2 billion in dividends during the past 12 months while the company spent $4.4 billion on share buybacks. Cisco has long favored share buybacks as a method to return cash to shareholders, but the dividend has grown in size relative to buybacks during the past few years.
Cisco can certainly afford to do both. During the past 12 months, the company generated $11.6 billion of free cash flow, putting the dividend payout ratio based on free cash flow at just 36%. Even without growing its profits at all, Cisco has plenty of room to grow its dividend further.
The good news is that Cisco expects to grow its earnings at a healthy pace. Earlier this year, the company guided for annual revenue growth between 3%-6% during the next three to five years, with non-GAAP earnings per share expected to grow at a faster 5%-7% annual rate. The core business will drive some of this growth, but areas such as cybersecurity and data center are growing faster.
During Cisco's latest quarter, the data-center segment grew by 24% year over year, while the security segment expanded by 7%. Cisco expects security sales growth to accelerate during the second half of this year.
Software is becoming a larger part of Cisco's business, and the company expects software revenue to grow by 10%-15% annually during the next three to five years. At that rate, software would account for as much as 25% of total revenue by 2020. Cisco is becoming a seller of networking solutions, instead of a seller of hardware, and the shift toward software has the potential to increase Cisco's profitability going forward.
With a low payout ratio, and earnings growth expected to be in the mid-single digits, Cisco should be able to grow its dividend by around 10% annually without too much trouble. Of course, Cisco could fall short of its growth expectations, or it could commit more cash to buybacks, both of which could result in smaller dividend increases going forward. But given the low payout ratio and the reduction in the share count driven by share buybacks, even a no-growth scenario can still support dividend growth, albeit at a slower pace.
Cisco offers a higher dividend yield than many other large tech companies, including Microsoft, which pays a 2.65% dividend, Apple, which pays a scant 1.75% dividend, and Intel, which pays a 2.8% dividend. With a dominant market share in its core switching and routing businesses, and growth opportunities in its other segments, Cisco is a great choice for dividend investors.
Timothy Green owns shares of Cisco Systems. The Motley Fool owns shares of and recommends Apple. The Motley Fool recommends Cisco Systems and Intel. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.