One of everyone's favorite areas to invest in are dividend-related stocks. They offer the benefit of income generation and potentially capital appreciation if investors can identify the right opportunities. I tend to stay focused on technology stocks and within that look for stocks that offer attractive yields and potential for growth. The following two stocks were chosen based on the following criteria:
3%+ Annual Dividend Yield
2014 EPS Growth Rate of 5%+
Stable Volatility Levels
Market Capitalization of 10 Billion+
Most investors probably consider Microsoft an overly mature company that is past its prime and doesn't offer new investors the possibility of strong returns. Well sometimes unexciting companies make for the best investments. Microsoft offers investors an attractive dividend, strong fundamentals, the potential for future growth, and stable volatility levels (which is especially for beneficial for older investors looking for capital preservation).
Microsoft offers investors a 3.1% annual dividend yield based on Wednesday's closing price of $29.62 and the current annual dividend amount of $0.92. There are four close competitors of Microsoft and each offer a dividend yield that is much lower. Those four competitors are:
In addition to the fact that Microsoft offers a more attractive dividend yield than its closest competitors, the company has a history of increasing its dividend payment offering investors the potential for an even more rewarding yield in the future. The latest increase occurred in September 2012 when Microsoft made the announcement that it was going to increase its dividend payment by 15%. Also, its interesting to note that the 2006 quarterly dividend amount was only 8 cents and it now stands at 23 cents. So clearly the company rewards investors as its bottom line continues to grow. Its not unreasonable for investors to expect the amount to continue to grow in the future.
For 2013, analysts are expecting earnings to come in at roughly $2.84 per share and $3.14 in 2014. While the 2013 EPS expectation isn't much to cheer about, the $3.15 number in 2014 would represent an 11% growth rate. These numbers may also turn out to be cautious estimates as I personally believe that consumers have been waiting to purchase new Microsoft product releases in the coming months, most notably Windows 8 and the Surface Tablet.
Lastly, Microsoft offers investors stable volatility levels, which basically mean that the share price doesn't see a lot of large increases or decreases. Instead, the stock either appreciates slowly or decreases slowly. This is especially attractive for older investors who are looking for capital preservation. Below is a chart showing that Microsoft volatility levels are at historically low levels.
While all signs point to Microsoft being a strong dividend stock for investors, it is important to look at some of the risks. The biggest risk is competition as Microsoft competes in some of the most innovative spaces in the market. It produces operating systems and thus faces competition from Apple (AAPL). It produces tablets and thus faces competition from Apple, Google, and Amazon.com (AMZN). All of these companies are on the cutting edge and thus it is essentially a race to see who can create the next product to capture the consumers' imagination. It might be Microsoft but there is also a strong likelihood that it won't be, and this could impact the bottom line.
Much like Microsoft, investors typically look at Intel and consider it a company without a lot of upside. And again, I have to insist that Intel offers a lot of potential for investors seeking stable returns.
Based on Wednesday's closing price of $21.75, Intel currently has an annual dividend yield of 4.1%. Without even considering the future growth potential, a 4.1% dividend yield for a stable and mature technology company should get investor interest fairly quickly. Let's compare Intel's dividend yield to a few of its close competitors:
Intel is clearly superior to its peers based on the dividend yield. But of course, that is only part of the picture. The company also has a history of increasing dividend payments which may result in a much higher dividend yield in the future. In 1996, the company was only paying a .00625 dividend each quarter. In 2000, that became a .02 quarterly payment. In 2004, it doubled to .04 and then doubled again in 2005. Since then, the company has continued increasing the amount which currently sits at .225 per quarter. With a cash position of over $8 billion, there is no reason to think that the dividend raises will stop.
Besides the attractive yield and potential for future increases, the company also has 2014 growth rate of over 7%. Analysts expect earnings of $1.91 for this current year and then expect that number to jump to $2.06 in 2014.
Another benefit with Intel are the stable volatility levels. As the chart below shows, Intel's volatility is currently sitting at historically low levels.
Much like what we saw with Microsoft, stable volatility levels offer investors peace of mind knowing that they shouldn't expect any surges or dramatic selloffs in the stock. Instead, they can expect slow but steady moves, and a solid dividend with the potential for future increases.
Intel does have a few concerns and I would be remiss if I didn't mention them. First, Intel's earnings are expected to dip from last year. Luckily for new investors, that has already been priced into the stock. Another potential concern is that although Intel's dividends have still been increasing, they've been growing at a smaller magnitude. The reason for this is because Intel has been trying to keep its microchip prices low to help attract new consumers for ultrabooks which are Intel's hybrid-tablet devices.
Although both Microsoft and Intel have a few risks for the future, both have shown the ability to continue thriving in an ever increasing technology world. Both understand the value of returning cash to investors while maintaining high levels of innovation. Both stocks are poised for strong growth and strong dividend streams.