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Summary

  • Solid tech growth stocks that pay dividends are hard to find.
  • Money is flowing into technology stocks creating premium valuations.
  • We need to focus on dividend-paying tech stocks with growth, good margins and solid valuation.

Dividends are hard to come by in the technology space, especially outside of mature mega-caps like IBM (NYSE:IBM) and Intel Corporation (NASDAQ:INTC). Companies are much more focused on using excess cash to fund growth rather than returning it to shareholders. Finding a company with strong growth and that has established a goal of a cash return to shareholders is a rare find. Investors may want to consider three companies below to provide the best of both worlds for their portfolio.

Growth, Dividends and Valuation - Not in Today's Market

As hard as it is to find tech growth stories that pay dividends on a regular basis, it has become even harder to find them at a reasonable valuation. Markets have shrugged off lower economic growth and political tension to reach all-time highs. Money is flowing into technology as investors look to higher capital spending and a strong acquisition market for new industries like cloud services and social networking.

Finding companies that provide a current yield to investors and have relatively strong outlooks is one thing. Sorting through the list to find stocks with reasonable valuations is another challenge entirely. Many of the candidates had recent news that pulled down values but not yet reflected in annual growth or margins. The three stocks below passed all three tests of growth, margins and valuation and could make strong additions to your portfolio.

Maxim Integrated Products (NASDAQ:MXIM) is a mid-cap player in the linear and mixed-signal integrated circuits market. While the space has seen weak sales growth over the last few years, the company's diverse offering in communications, computing, consumer and industrial markets has helped it maintain top-line growth. Sales have increased by a compound annual rate of 9.3% over the last five years against average annual growth of 6.5% across the industry. Even in a tough pricing environment, the company has been able to achieve an operating margin of 22.8% and pays a 3.2% dividend yield.

Shares trade at the industry average of 3.7 times on an enterprise value-to-sales ratio while the price-earnings ratio of 19.1 times trailing is slightly below the average for circuit manufacturers. Earnings are forecasted to fall this year on continued weakness in the industry but are expected to rebound sharply next year. The combination of strong performance and reasonable valuation makes the stock a strong bet for when demand returns for circuits.

Magic Software (NASDAQ:MGIC) has a market cap of just $309 million and may be one of the most undervalued tech names in the market. The company provides application development and business process integration services through its own proprietary platforms. Sales have increased at an annual compound rate of 24.9% over the last five years and 2013 sales were nearly half of the company's current market cap. The operating margin of 13.3% is lower than the 16.1% average for the software industry but still respectable and has been stable over the last three years. The company has $36 million of cash and only $3 million of debt on the balance sheet and pays a 2.8% dividend yield.

The company was named DeveloperWeek's 2014 Top Innovator for mobile development for the company's leading enterprise mobility solution. Shares trade at 16.8 times trailing earnings and for an enterprise value of just 1.9 times sales, leaving the door open for an acquisition.

J2 Global (NASDAQ:JCOM) is a $2.3 billion provider of business cloud services and digital media. The cloud services segment has a strong customer base in small- to medium-sized businesses and may be an attractive target for a larger cloud services provider with a portfolio of larger company customers. The digital media segment, an ad-driven portfolio of websites around the lifestyle, gaming and technology genres, does not really strategically fit with the cloud services company. A healthy balance sheet and relatively low valuation may attract a buyer from the private equity or activist investor space to push for a split.

J2 Global has grown revenue by a compound annual rate of 17.6% over the last five years while achieving a 33.7% operating margin over the last year. The company has just under $300 million of cash and $245 million of debt on the balance sheet and pays a 2.0% dividend yield.

The shares trade for an enterprise value of 4.6 times sales, not the cheapest on our list but still attractive given valuations for other players in the cloud services space. A price-to-earnings ratio of 16.9 times trailing is just over the industry average of 16.3 times earnings.

I'm a firm believer in portfolio diversification. Unfortunately, as a die-hard dividend investor, it seems my choices are limited in certain sectors and industries. If I just added stocks with the highest dividends to my portfolio, I would be left with a compilation of a couple of industries and exposed to risk of systemic failure in any one group. Finding companies in other sectors, like technology, that provide a solid outlook for growth and a cash yield is always a relief. Finding companies that fulfill these two needs but are also trading at relatively cheap prices is a great added bonus.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Source: 3 Tech Dividend Bargains