Which Of The Russell 3000 Technology Companies Is Most Attractive To Dividend Investors?

by: Arie Goren

Not many technology companies pay dividends. Among the 465 technology companies that are included in the Russell 3000 index, only 119 companies pay dividends. The average annual dividend yield of these companies is 2.21% while the median is 1.99%. Nam Tai Electronics Inc (NTE) has the highest yield at 8.60%, and Fair Isaac Corp (NYSE:FICO) has the lowest yield at 0.16%.

In this article, I tried to determine which of the Russell 3000 technology companies is the most attractive for dividend-seeking investors.

I consider that besides healthy dividend yield, low payout ratio and consistent dividend growth are the most crucial factors for dividend-seeking investors. In addition, since dividend investors try to avoid too much risk, The Sharpe ratio, which measures the ratio of reward to risk, is also extremely important.

I have screened the Russell 3000 technology companies that pay dividends according the above-mentioned principles.

The screen's method requires all stocks to comply with all following demands:

  1. The payout ratio is less than 100%.
  2. The annual rate of dividend growth over the past five years is greater than zero.
  3. The forward dividend rate is equal or greater than the trailing dividend rate.
  4. Sharpe ratio is greater than 1.0.

Furthermore, I ranked all the stocks that complied with all the required demands according to a formula that I constructed, which gave 35% weight to the yield, 35% to the payout ratio, 20% to the dividend growth and 10% to the Sharpe ratio.

In order to find out how such a ranking formula would have performed during the last 14 years, I ran a back-test, which is available by the Portfolio123's screener. For the back-test, I took the 406 Russell 3000 companies that pay dividends and comply with all the above-mentioned demands.

The back-test results are shown in the chart below. For the back-test, I divided the 406 companies into ten groups according to their ranking. The highest ranked group with the ranking score of 90-100, which is shown by the dark green column in the chart, has given by far the best return, an average annual return of almost 21%. Also, the second and the third group (scored: 80-90 and 70-80) have given superior returns. This brings me to the conclusion that my ranking system is useful.

I used the Portfolio123's powerful screener and ranking system to perform the search. All the data for this article were taken from Portfolio123. After running this screen on June 11, 2013, before the market open, I discovered 27 technology stocks which comply with all the demands.

The table below presents the best twenty companies in the order of their rank.

The table below presents the dividend yield, the payout ratio, the annual rate of dividend growth over the past five years and the Sharpe ratio for the twenty companies.

The table below shows the most influential parameters, for dividend-seeking investors, for the six best ranked Russell 3000 technology companies according to my criteria.

Chart: finviz.com

Chart: finviz.com

Chart: finviz.com

Chart: finviz.com

Chart: finviz.com

Chart: finviz.com


Which of the six technology companies is the most attractive for dividend-seeking investors? All the six stocks look quite attractive to dividend-seeking investors due to their solid dividend and their long-term track record of consistent and rising dividend payments. Seagate Technology Plc (NASDAQ:STX) has the highest yield among the six companies, but it has negative growth prospects. TE Connectivity Ltd (NYSE:TEL) has a good yield of 2.21% and all its valuation parameters are quite good. Harris Corp (HRS) has a solid yield of 2.94%, but its PEG ratio is very high at 6.46. Xerox Corp (NYSE:XRX) has a good yield of 2.50% and all its valuation parameters are very good. Henry (NASDAQ:JACK) & Associates Inc. (NASDAQ:JKHY) has the lowest yield among the six companies at 1.69% and its trailing and forward P/E are quite high at 23.63 and 20.72. Accenture PLC (NYSE:ACN) has the second lowest yield among the six companies at 1.99% and its trailing and forward P/E are quite high at 18.99 and 17.44

Considering all these factors, the bellwether Xerox Corp is in my opinion, the most attractive technology company to dividend investor, and I think it is selling now at a bargain price.

Some additional points to its compelling valuation and its good dividend yield that make me believe that XRX stock is quite attractive:

  • Xerox continues to execute on its transition to a services-based model.
  • The services portions of Xerox continue to grow and expand margins.
  • Services signings surged 64% year-over-year for 1Q13, for the highest level since 4Q11.
  • Xerox reported mixed results for 1Q13 relative to consensus expectations, but the management reiterated its full-year guidance.
  • When Xerox finishes adjusting its operating model, the company should be more profitable.

Disclosure: I am long STX. 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.