Building a Model Income Portfolio Sector by Sector: Part 7 - Information Technology

by: Clay King

In the sixth article in our series in building a model income portfolio by sector, we turn to information technology. Included in this sector are software, semiconductors, data processing, and computer hardware.

Technology stocks are primarily considered to be growth companies. However, many have built a strong cash flow over the years, which coupled with a company policy of rewarding shareholders, are paying strong and rising dividends. The sector enjoyed a huge bull market in the 1990s only to become grossly overvalued at a time when the economy was slowing. The resulting bear market destroyed valuations, in some cases bankruptcy was the final result. However, the sector is still the leading performance leader over the last 20 years.

The sector returned 14% over the previous twenty years, with a rolling one year range of -63% to a high of +105%. The S&P 500 returned 8.1% with a high low rolling one year range of -45% to +50%. The S&P 500 sector weightings are shown in the table below.

S&P 500 Sector Weights

Consumer Discretionary 10.7%
Consumer Staples 10.7%
Energy 12.6%
Financial 15.0%
Heath Care 11.9%
Industrials 11.2%
Information Technology 17.7%
Materials 3.6%
Utilities 3.4%
Telecom Services 3.1%

In keeping with our series standards the criteria for the screen was composed of the following:

  • Current yield greater than 3%.
  • Five year dividend growth rate greater than 5%.
  • Payout ratio less than 60%.
  • Five consecutive years of dividend increases.

Technology Dividend Criteria

Company Current Yield Dividend Growth Rate Previous 5 Years Payout Ratio P/E Est. Current Year Est. Long Term Growth Rate
Automatic Data 3.2% 13% 57% 16.6 10%
Diebold 4.5% 5% 53% 11.9 11%
Harris 3.2% 21% 21% 6.8 8%
Intel** 4.2% 12% 32% 8.5 10%
Linear Technology 3.7% 9% 37% 12.2 10%
Microchip Technology 4.6% 7% 59% 14.2 10%

** Intel did not raise the dividend in 2009 but has raised it twice in 2011 so we shall consider that as a make-up increase.

In terms of the longest and most consistent history of dividend and earnings I rank the five stocks as following.

  1. Automatic Data (NASDAQ:ADP)
  2. Diebold (DBD)
  3. Harris (NYSE:HRS)
  4. Intel (NASDAQ:INTC)
  5. Linear Technology (NASDAQ:LLTC)
  6. Microchip Technology. (NASDAQ:MCHP)

Automatic Data stands well above the competition with a superior history of steady increases in earnings and dividends. Diebold has a similar history, though not as polished or as straight lined as Automatic Data. Harris has a good record but reduced the dividend in 1999, but since has restored the dividend well past levels at that time. Intel began paying a dividend in 1992 and since 2003 has accelerated the pace of annual increases. Linear and Microchip are similar in records, with shorter records of dividend payments

Techology Historical Yield Ranges

Company Current Yield Monthly High Monthly Low Median
Automatic Data 3.2% 3.6% 0.5% 1.3%
Diebold 4.5% 4.8% 0.9% 2.1%
Harris 3.2% 10.8% 0.6% 2.7%
Intel 4.2% 4.4% 0.1% 0.3%
Linear Technology 3.7% 4.2% 0.1% 0.6%
Microchip Technology 4.6% 7.2% 0.3% 2.9%

Top choices for current yield are clearly Diebold, Intel, and Microchip. Best choice for long term record is Automatic Data. An investor should do well with any choice, but I personally favor Intel and Microchip for current yield. I have added shares of Intel to my existing position during the recent market pullback.

Disclosure: I am long INTC, MCHP, PAYX, QCOM, EMC.