As many of us can remember, the go-go 90s was a time of tremendous growth in the tech sector. The NASDAQ 100 rallied every day and it seemed limitless. Then the tech bubble burst and many got burned. Many of the smart technology companies retrenched and built strong businesses. Many others simply went out of business. Those companies that are still around have become tremendous cash generators as their businesses became highly profitable as their competition went bust. The tech companies from the 1990s are the new industrials of our time and known for their steady dividends and attractive dividend yields.
1. Intel Corporation (INTC), Dividend Yield: 4.20%
Intel Corporation is the one of the grandfathers of the modern tech industry. The company has been around since 1968 when it was founded by Gordon Moore, Robert Noyce and Arthur Rock. Gordon Moore is the one who coined the term "Moore's Law" that stated the number of transistors on integrated circuits doubles every two years (later every 18 months). The stock peaked in 2000 at just above $73 and has been trading in the low 20s for the past several years.
The strength in Intel's business lies in its dominance of the microprocessor market. According to International Data Corporation, Intel commands 79.3% of the global PC microprocessor business and 84.4% of the notebook microprocessor business. Intel is also making entry into redefining different tech markets, including its newest Display as a Service (DaaS) offering. This technology hopes to allow video coming from one device, such as a laptop, to be displayed on another, such as a big-screen TV or tablet (read more here).
The most attractive aspect to Intel's stock is its cheap valuation. Peter Lynch is huge believer in the PEG ratio, which is a company's Price/Earnings divided by its Annual EPS Growth. Peter Lynch said that "the P/E ratio of any company that's fairly priced will equal its growth rate." In other words a fairly valued company should have a PEG ratio of 1. In Intel's case, it has a PEG ratio of 0.91. The company has a forward P/E of 10.23 and commands an operating margin of 27.44%. The company has $3.68 per share in cash on the balance sheet, more than enough to cover the yearly 90 cent dividend. Besides the attractive dividend for Intel stock, the potential upside lies in the fact that current CEO Paul Otellini is retiring in May. Originally it was thought that an insider would replace him; however, the board has hired Spencer Stuart to look outside the company to help find a successor. The next CEO has the potential to remake the company and get into the contract manufacturing business. This would allow the company to manufacture chips for a company like Apple. Intel currently has less than 1 percent of the global smartphone and tablet microprocessor business.
2. Apple (AAPL), Dividend Yield: 2.50%
Yes you are reading this correctly. I am going out on a limb here and saying that Apple is an attractive tech dividend stock. Shoot me, but I'm not wrong here. The company is a value investor's dream. If you're impressed with Intel's PEG ratio of 0.91, how about Apple's 0.51 (see why Apple is cheap across the board). Apple's growth since Steve Jobs took over in 1997 has been nothing short of extraordinary. The company's growth has to slow from previous levels. It cannot keep growing at the pace that it once was. Investors have to accept that fact and move on. The way investors view and value Apple has to change. What was once a phenomenal growth story is now a phenomenal value play. For a more in depth analysis of why I feel investors should own Apple, please look at my previous story on Apple. It spells out the compelling value currently in Apple stock (read more about Apple's under-appreciated dividend).
3. Texas Instruments (TXN), Dividend Yield: 2.40%
Texas Instruments, like Intel, is another grandfather of today's modern tech industry. The company was founded in 1951 and has been making semiconductors ever since. When it comes to a mature tech stock, it doesn't get any more mature than Texas Instruments right? Well how come the company hit a new 52-week high of $35.32 on Friday? This old grandfather still wants to run. Last week Texas Instruments raised its Q1 guidance and said that customers increased orders as electronics demand has rebounded. The company supplies the entire chip industry as its chips are used in all facets from automobiles to microwaves. Texas Instruments said earnings will come in at between 28 and 32 cents a share and revenues of between $2.8 billion and $2.91 billion. That's compared to last year when earnings came in at 22 cents a share and total revenues of $3.12 billion. Last month the company increased its quarterly dividend by 33% and announced a $5 billion share buyback. The company is also paring expenses as it is exiting the digital chip business for smartphones. The expected savings are forecast to be $450 million a year.
4. Cisco Systems (CSCO), Dividend Yield: 2.70%
Cisco Systems was one of the original go-go stocks of the 1990s. At the height of the dotcom bubble, it was at one point the most valuable company in the world with a market capitalization of more than $500 billion. Today it's the established market leader in networking with a market cap of $116 billion. Cisco hit a 52-week high on Friday of $21.97. Cisco as the market leader in networking is a cash cow. The company maintains an operating margin of 22.68% and a 17.78% return on equity. Cisco has $8.70 per share in cash on the books. With an annual dividend of 56 cents a share, I see the company increasing its dividend payout considering the sizable amount of cash on its balance sheet. I also think there's room for upside in the stock when CEO John Chambers eventually leaves. He has been the CEO since 1995 and many feel that change would be good for shareholders.
5. Microsoft Corporation (MSFT), Dividend Yield: 3.30%
Last, but not least, is the blue chip of the tech world - Microsoft. No matter what many say about CEO Steve Ballmer and his missteps, the company still dominates the global PC market with its Windows operating system. A challenger to that business never emerged and that's why the company still commands an operating margin of 35.43%. The company has $8.13 per share on its balance sheet and pays out 92 cents per share a year in dividends. Chairman Bill Gates and CEO Steve Ballmer still own a huge chunk of the company's stock and they welcome the dividends. I look for dividends from Microsoft to increase in the future.
These are 5 technology bellwethers that we all are familiar with. What we all may not know is the rich dividends that these five pay. Upon closer look, I think all income investors should own these stocks and three of them are in the top ten of tech stocks loved by hedge funds (see all 10 here).