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Many investors, such as Warren Buffett, speak highly of defensive investing. As Buffett’s mentor Benjamin Graham recommended, investing with a margin of safety can be highly valuable in an especially inflationary environment.

Recently we showed that this strategy may be advantageous for investors of mega-cap Technology stocks in the near future. Defensive investing in high dividend-yielding tech stocks provides a better protection in down markets -- though defensive strategy may not yield the best returns in bull markets.

Similar strategy can be applied to the Tech sub-sectors, such as Business Software & Services. Although the risky stocks with low dividend yields have benefited from the recent bull market, investors may need to be cautious in the near future. We are concerned about the Fed’s inflationary monetary policy, and we think investors should play more defensively and pick defensive stocks with high dividend yields in order to protect themselves against inflation.

We compiled a list of 26 Business Software & Services Stocks (the sector classifications are sourced from Finviz) by market cap (>$1B) 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

AUTOMATIC DATA PROCESSING INC

ADP

2.6%

17.54%

31.2%

BLACKBAUD INC

BLKB

1.6%

12.10%

30.4%

IRON MOUNTAIN INC

IRM

1.5%

30.50%

32.1%

HENRY JACK & ASSOC INC

JKHY

1.2%

8.74%

28.2%

PATNI COMPUTER SYSTEMS LTD

PTI

0.8%

-24.22%

-37.2%

SOLERA HOLDINGS INC

SLH

0.5%

12.66%

48.5%

PEGASYSTEMS INC

PEGA

0.3%

4.13%

21.0%

AVERAGE

8.8%

22.0%

STOCKS WITH NO DIVIDEND YIELDS

Dividend Yield

YTD Return

52-week Return

ASPEN TECHNOLOGY INC

AZPN

0.0%

31.18%

45.0%

BLUE COAT SYSTEMS INC

BCSI

0.0%

-18.65%

-19.8%

COGNIZANT TECHNOLOGY SOLS CORP

CTSH

0.0%

4.34%

48.7%

CITRIX SYSTEMS INC

CTXS

0.0%

22.39%

79.5%

CONVERGYS CORP

CVG

0.0%

2.66%

13.2%

AMDOCS LTD

DOX

0.0%

8.12%

-3.6%

INFORMATICA CORP

INFA

0.0%

22.96%

123.8%

J D A SOFTWARE GROUP INC

JDAS

0.0%

20.50%

21.9%

LONGTOP FINANCIAL TECHNOLOGIES

LFT

0.0%

-47.73%

-37.5%

MICROSTRATEGY INC

MSTR

0.0%

58.30%

85.7%

NETSUITE INC

N

0.0%

39.60%

126.5%

NETSCOUT SYSTEMS INC

NTCT

0.0%

0.7%

65.4%

QLIK TECHNOLOGIES INC

QLIK

0.0%

19.13%

103.6%

QUEST SOFTWARE INC

QSFT

0.0%

-18.35%

32.5%

SAPIENT CORP

SAPE

0.0%

20.00%

45.9%

SUCCESSFACTORS INC

SFSF

0.0%

15.50%

56.8%

S S & C TECHNOLOGIES HLDGS INC

SSNC

0.0%

-3.75%

28.8%

T I B C O SOFTWARE INC

TIBX

0.0%

49.62%

154.2%

VERINT SYSTEMS INC

VRNT

0.0%

11.23%

33.1%

AVERAGE

12.5%

52.8%

In the last 52-week period, the average return of the seven dividend yielding business software & services stocks was 22.0%. The second group of 19 stocks with no dividend yields performed much better in the same period as we expected, returning 52.8% on average. However, no-dividend stocks have been outperforming the stocks with dividend yields by just a small margin in 2011. The average YTD return of the first group was 8.8% vs. 12.5% for the second group. The returns of the two groups are comparable since the beginning of this year. Now may be a good time to switch to dividend yielding business software & services stocks.

Five top business software & services stocks with dividend yields are as follows:

  1. Automatic Data Processing is a leading provider of integrated computing and business outsourcing in the world. ADP has a 2.6% dividend yield and traded at $53.58 recently. ADP returned 31.2% during the past 12 months, while it gained 17.54% since the beginning of this year. The stock has a market cap of $26.77 and P/E Ratio of 21.89. Jean-Marie Eveillard’s First Eagle had the largest position in ADP at the end of December. Bill Ackman’s Pershing Square also had $65 Million in ADP.
  2. Blackbaud Inc. is a software company providing software and services for non-profit organizations. BLKB has a 1.6% dividend yield and returned 30.4% during the past 12 months. BLKB recently traded at $28.24 and returned 12.10% year-to-date. The stock has a market cap of $1.22 and P/E ratio of 39.22. David Blood and former Vice President Al Gore’s Generation Investment Management is a large BLKB investor.
  3. Iron Mountain Inc. is a US company providing information storage and information management services worldwide. IRM recently traded at $32.66 and has a 1.5% dividend yield. IRM returned 32.1% during the past 12 months, while it gained 30.50% since the beginning of this year. The stock has a market cap of $6.55B. Paul Singer’s Elliott Management has the largest IRM position among the 300+ funds we are tracking.
  4. Jack Henry & Associates Inc. is an IT company providing integrated computer systems and specialized services for financial institutions. JKHY recently traded at $31.28 and has a dividend yield of 1.2%. JKHY returned 28.2% during the past 12 months, while it gained 8.74% since the beginning of the year. The stock has a market cap of $2.70B and P/E ratio of 20.58.
  5. Patni Computer Systems is an Indian company providing IT and software implementation services. PTI has a 0.8% dividend yield but lost 37.2% during the past 12 months. PTI recently traded at $15.80 recently and returned -24.22% year-to-date. The stock has a market cap of $1.04B and P/E ratio of 8.00. Jim Simons’ Renaissance had a small position in PTI at the end of December.
Source: 26 High Dividend Business Software Stocks