4 Dividend Paying Technology Stocks That Are Safer Than Treasuries

by: Charlie Zhou

With so much uncertainty in the economy, investors should focus on companies with strong competitive positions, solid balance sheets and rich dividends to wait out the storm. Looking around the market, I can think of many technology names that fit this profile. They almost all have very solid balance sheet with tons of cash and are well-positioned to benefit from any future global rebounds. Most of these names pay higher yields than U.S. Treasury and the balance sheets can withstand any economic shock. Here are 4 names to consider:

Microsoft (NASDAQ:MSFT) – the world’s largest software company with a monopoly on global operating systems and office suite applications. Its Windows operating systems is so entrenched in our world that it is almost impossible to replace. For example, Windows XP is nearly 10 years old yet it still has 40% of the market share. People use it not because they want to but because they have to. What other technology companies can say that about their 10-year old product? There are very few companies out there with such advantage. With a PE of only 9x and over $50 billion in cash, the stock is trading at multi-decade low. The company is paying a 3% dividend and there are plenty of rooms for raising the dividend. With Windows 8 promise to imitate many functionalities of Apple’s (NASDAQ:AAPL)OS, there should be strong demands for replacements.

IBM (NYSE:IBM) – The Big Blue was the first technology stock that Mr. Buffett purchased for his portfolio. His entry into the company should be seen as a vote of confidence on its management and valuation. Although the company still has its mainframe business, it’s primarily a service-oriented firm. Unlike other consulting firm, IBM is almost indispensible to its clients. They are amazingly sticky to IBM’s services. In fact, Mr. Buffett cited IBM’s loyal client base as one of his reasons for the purchase. In addition to superior customer service, the firm has an eye popping 60% on ROE, which is much higher than that of Apple and Microsoft. With a dividend yield of 1.5% and PE of 15, the stock is fairly valued compare to other stocks mentioned here. Judging from the management’s actions in the past 5 years, it prefers stock buyback than dividends. It has averaged 5 times greater buyback than the dividends it has paid out. At $190, the stock price isn’t much higher than what Mr. Buffett paid on the open market (his average price was in the $160s range)

Intel (NASDAQ:INTC) – The largest chip-maker lowered its guidance on December 12th after the devastating flood in Thailand that affected hard drive demands. The company makes the “brain” of computers. Other parts of the PC can be easily produced but it takes enormous amount of R&D to develop a CPU. In fact, the barrier to entry in this market is so high that the only other real competitor is AMD, which has suffered horribly this year on repeated earnings disappointments. Intel’s guidance change is caused by factors beyond its control and isn’t likely to be repeatedly. At a PE of only 10 and dividend of nearly 3.5%, it’s one of the cheapest stocks around with dividend level approaching that of utility companies. The PC industry might suffer short-term setbacks but it isn’t going to shrink much given the importance of computers in our society. Intel is at the forefront of chip development and short-term setbacks are great opportunities for investors to jump in.

Cisco (NASDAQ:CSCO) – Cisco is the world’s largest networking and communication equipment maker. The performance of Cisco’s financial performance is often seen as a bellwether of the broader technology market. The company maintains a strong technological lead over other competitors. CEO Chamber’s strategy is "Whatever works best for customers -- and if we don't have the best technology, we'll acquire it.” As cloud services and TV streaming become more popular, the demand for data will surge and so will the demand for Cisco’s products. With a cash chest of $44 billion, nearly half of Cisco’s market capitalization is in cash or 1/3 if you back out the debt. At a PE of 16, the stock is trading at a lower valuation than many other technology stocks. The company is paying a 1.3% dividend, which has plenty of room to grow since dividend payment only takes up $600 million out of its $10 billion free cash-flow. Additionally, the firm is buying back $5 billion a year of stocks or equivalent to 5% of the market capitalization.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.