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In a previous article, we discussed defensive investing in the Technology sector and we showed that investing in large-cap Tech stocks with high dividend yields may be a good strategy for the near future. Defensive investing may not yield the best returns in bull markets, though it provides better protection against a down trend.

The same defensive strategy may also be viable for different industries, such as Application Software, within the Tech sector. The risky stocks with low dividend yields may have taken advantage of the recent bull market as the economy recovered. On the other hand, we are concerned about the upcoming inflationary environment and we believe investors should invest more defensively in the near future and look for high dividend yielding stocks.

We compiled a list of the top 20 Application Software Stocks (the sector classifications are sourced from Finviz) by market cap and ranked them based on their 12-month dividend yields. The stocks with dividends and no dividends, and their performances are shown below:

STOCKS WITH DIVIDEND YIELDS

Dividend Yield

YTD-Return

52-week Return

VERISIGN INC

VRSN

7.5%

21.00%

49.0%

MICROSOFT CORP

MSFT

2.3%

-9.80%

-11.4%

S A P AG

SAP

1.1%

24.09%

40.6%

C A INC

CA

0.7%

-6.15%

7.5%

ORACLE CORP

ORCL

0.6%

12.82%

46.6%

AVERAGE

8.4%

26.4%

STOCKS WITH NO DIVIDEND YIELDS

Dividend Yield

YTD-Return

52-week Return

ADOBE SYSTEMS INC

ADBE

0.0%

14.78%

4.5%

B M C SOFTWARE INC

BMC

0.0%

15.55%

47.3%

COMPUWARE CORP

CPWR

0.0%

-3.94%

38.7%

SALESFORCE COM INC

CRM

0.0%

2.20%

56.5%

F 5 NETWORKS INC

FFIV

0.0%

-19.61%

49.9%

I H S INC

IHS

0.0%

8.88%

65.4%

INTUIT INC

INTU

0.0%

12.27%

53.9%

MICROS SYSTEMS INC

MCRS

0.0%

13.29%

42.7%

M S C I INC

MSCI

0.0%

-5.03%

9.8%

NUANCE COMMUNICATIONS INC

NUAN

0.0%

20.79%

33.7%

OPEN TEXT CORP

OTEX

0.0%

34.54%

40.5%

PROGRESS SOFTWARE CORP

PRGS

0.0%

0.46%

32.2%

RED HAT INC

RHT

0.0%

2.7%

59.8%

REALPAGE INC

RP

0.0%

-4.88%

102.6%

SXC HEALTH SOLUTIONS

SXCI

0.0%

40.88%

85.6%

AVERAGE

8.9%

48.2%

In the last 52-week period, the average return of the 5 dividend yielding application software stocks was 26.4%. The second group of 15 stocks with no dividend yields performed much better in the same period as we expected, returning 48.2% on average. However, no-dividend stocks have been performing just slightly better than the stocks with dividend yields since the beginning of the year. The average YTD return of the first group was 8.4% vs. 8.9% for the second group. As the returns of the two groups are comparable this year, it seems like a good time to switch to dividend yielding application software stocks for dividend seekers and defensive investors.

Five application software stocks with dividend yields are as follows:

1. Verisign (VRSN): Verisign is a US company providing Internet infrastructure services. VRSN has a high dividend yield of 7.5% dividend yield and returned 49% during the past 12 months. The stock also performed well since the beginning of this year, returning 21.00%. The stock has a market cap of $6.15 and P/E Ratio of 7.80. Billionaire Jim Simmons has a large position in VRSN. Ken Garschina’s Mason Capital and Jeffrey Ubben ValueAct Capital also have large holdings in VRSN.

2. Microsoft Corp. (MSFT): Microsoft Corp. is one of the largest developers and manufacturers of software products in the world. MSFT has a 2.3% dividend yield but lost 11.5% during the past 12 months. MSFT recently traded at $25.03 and returned -9.80% year-to-date. The stock has a market cap of $211.07B and P/E ratio of 9.94. MSFT is one of the favourite stock picks of Whitney Tilson. Billionaire Leon Cooperman also invested in MSFT.

3. SAP AG (SAP): SAP AG is a German company providing business software and applications worldwide. SAP has a 1.1% dividend yield and returned 40.6% during the past 12 months. SAP also performed well in 2011, returning 24.09%. SAP recently traded at $62.80. The stock has a market cap of $74.64B and P/E ratio of 29.09.

4. CA Inc. (CA): CA Inc. is an independent software corporation providing enterprise software products and IT services. CA recently traded at $22.90 and has a dividend yield of 0.7%. CA returned 7.5% during the past 12 months, while it lost 6.15% since the beginning of the year. The stock has a market cap of $11.68B and P/E ratio of 15.97.

5. Oracle Corp. (ORCL): Oracle Corp. is a US company providing hardware systems and business software products worldwide. ORCL has a 0.6% dividend yield and returned 46.6% during the past 12 months. ORCL recently traded at $73.59 recently and gained 12.82% year-to-date. The stock has a market cap of $178.08B and P/E ratio of 23.32. ORCL is one of Ken Fisher’s top positions. Tom Steyer’s Farallon made a bullish bet on ORCL during the first quarter of 2011, increasing its position by nearly 75%.

Disclosure: I am long MSFT.

Source: Time to Rotate to High Yielding Application Software Stocks: 5 to Consider