Top 10 Power Ranking Divvy Techs
Summary
- Tech stocks usually don’t show an impressive dividend profile on the market.
- But some of them deserve a mention and a place in your portfolio.
- Here’s my top 10 of stocks that combine both growth and dividend growth.
With Facebook (FB) and Amazon (AMZN) getting hit from right left and center these days, investors pretty much keep their focus on the FAANG. When we think of tech stocks, we often imagine a bunch of geeks typing on their computer with 3 screens in front of them. We also imagine young, hip and fast-moving companies with great potential to bring triple-digit returns in our portfolio.
But what about the “older guys” that went through years of great returns and have now decided to pay dividend? Most old techs have several things in common:
- They have built a business model that is profitable and shows it can go through a storm;
- They are cash rich;
- They started to share the wealth with shareholders;
- They have a double-digit dividend growth potential for the next decade.
Do you want to turn down those companies? I certainly don’t want to. As I focus on dividend growth to build my portfolio, the technology sector is among my favorite to build the core of my nest egg. Here are my top 10 divvy techs with three reasons to hold them. My top 5 show a great combination of solid business model (e.g., strong cash flow generation) along with solid growth vectors for the coming decades. All companies show a double-digit dividend growth potential too. You can’t ignore nerd stocks anymore!
10) Broadcom (AVGO)
Broadcom is making the last spot of my power ranking mainly due to its failed attempt to purchase Qualcomm (QCOM). Broadcom is a giant in the semiconductor industry. It operates four segments: wired infrastructure, wireless communications, enterprise storage and industrial & others. Besides the acquisition drama, AVGO has posted a solid first quarter.
First, the company’s FBAR (film bulk acoustic resonator filters) is among the best filters for frequencies above 2 gigahertz. This is how it has become a critical component for 4G LTE smartphones. Second, the growth of Internet of Things (IoT) and Artificial Intelligence (AI) applications will require AVGO technology for the next decade. With over 22,000 patents, Broadcom will remain a leader in its sector. Third, Broadcom doesn’t not only grow organically, but also has a solid growth-by-acquisition strategy in place. The company may have failed to acquire QCOM, but it will certainly pursue other opportunities.
9) Intel (INTC)
Intel stock was hit not too long ago due to rumors that Apple (AAPL) would drop the world largest chip maker to make its own for its Macs. Intel has set the gold standard in term of chips for PC. With Apple dropping it and PC sales sluggish, one may think that INTC is dead money. This is certainly not good news, but Intel shows many growth vectors able to compensate for this loss.
First, INTC has successfully managed to switch its business model around data-centric activities. The rise of the cloud business requires solid infrastructure that Intel can provide. Second, the company is the leader in semiconductor market, and its heavy investment in R&D protects this cash cow business for years. Third, Intel has made promising acquisitions (Altera, Mobileye, Nervana, and Movidius) to build a solid reputation in the AI and automotive technology worlds.
8) Open Text (OTEX)
With a market cap of $9 billion, you might have never heard of this small Canadian tech (trading on both markets). Surprisingly, Open Text shows over 100,000 clients and 41% of its revenue coming from outside North America. This is a great source of diversification for a small tech!
First, OTEX is a leader in Enterprise Information Management (EIM). EIMs are used to managing large amount of data to provide companies an edge over their competitors. In other words, instead of getting piles of data you don’t even time to look at, an EIM will filter, manage and present the information in a way you can take action. Second, as many techs, OTEX operates a growth-by-acquisition strategy like a champ. Since its creation in 1991, the company has successfully performed 58 mergers & acquisitions. Third, the move toward the cloud business enables OTEX to offer multiple cross-selling options. OTEX has plenty of growth opportunities by offering business network, IoT, and AI solutions to its existing clients.
7) Analog Devices (ADI)
As the name suggests, ADI is one of the largest analog chipmaker in the world. Don’t only focus on PCs requiring such component. In fact, ADI has successfully transformed its business over time. Analog chips are used to convert real-world signals into data. Yeah, it sounds boring, but it has great growth prospects! This technology has been used in automotive and industrial sectors. Analog Devices is also a dividend achiever, showing over 10 years of consecutive dividend increase. Click here to access the complete Achievers list.
First, ADI benefits from stronger demand in the automotive industry for in-dash information displays and safety sensors. Second, the company evolves as a big player in a fragmented market. This allows it to enjoy additional economy of scale compared to its peers. Third, this environment is favorable for mergers & acquisitions. ADI purchased Linear Technology and completed this in a nearly $15 billion deal in 2017. The combination of both companies will offer the widest array of products in the analog industry and should generate about $1 billion in synergy.
6) Visa (V)
Visa is often classified by investors to be a financial company. In fact, I guess we can argue on that for a while, but V isn’t part of the Financial Select Sector SPDR ETF (XLF) holdings. While it does process financial transactions, this is a pure tech play. It is not higher in this power ranking mainly due to its low yield that often disqualifies it by dividend investors. However, I think you should not discard Visa from your buy list - not just yet.
First, the company is a dividend growth power stock. After increasing its dividend in December 2017 and again in January, Visa now shows a 5-year dividend growth of 154.5%. With a payout ratio around 50% and a booming business, you can expect several years of double-digit dividend raise. Second, Visa operates the largest network of money transaction with 44% market share. Each day, more cash money transactions switch over to electronic payments. Visa makes a cut each time a transaction is processed through its network. Third, the company is exploring various other growth vectors in the future. Business to Business, Gov’t to Gov’t and cryptocurrency payments are among new ways of payment where Visa is a player.
5) Mastercard (MA)
Mastercard is the second-largest payment network behind Visa. The reason why it beat V to make the top 5 is mainly related to the current momentum. MA has outperformed V on the stock market about 10% since the beginning of the year. This is one of the rare dividend growth stocks showing a strong performance in 2018.
First, as it is the case for Visa, MA benefits from the current tailwind where cash money transactions are switching over new payment methods. The future relies with payment networks operators. Second, MA is extending its data analytic capacities. This will enable the company to become a key player in mobile payment. Digital wallets are just another example of how the way we pay is changing. Third, if you think Visa's dividend growth over the past 5 years was impressive (+154%), Mastercard doubled Visa’s dividend growth with a whopping 316.7% increase during the same period. I think we can forgive a 0.55% yield in this case.
4) Texas Instruments (TXN)
Texas Instruments has quickly found its place among the automotive and industrial sectors. It is the world largest analog chip maker and an important supplier of embedded chips into a host of applications. TXN shows 13 consecutive years with a dividend increase, making it part of the Dividend Achievers list.
First, TXN isn’t just a bunch of geeks developing chips. The company has invested massively in a marketing and sales team. Therefore, it counts on a strong sales force that is knocking on businesses doors to offer its services. Second, there is a strong demand for embedded chips. Management expects revenue growth of 6-7% for the upcoming years. The demand is particularly strong in the automotive and industrial segments. Third, TXN benefited from a fragmented market to purchase many manufacturers at a low price and consolidate its position in the analog chip business. As the IoT is constantly growing, TXN will continue to surf this tailwind for years to come.
3) Cisco (CSCO)
Cisco has established the gold standard in switches and routers. What used to be an old technology is now evolving toward data-centric services and the cloud business. CSCO hasn’t done much for the first half of 2017, but it is now jumping by more than 20% over the past 6 months.
First, CSCO counts on a huge portfolio of clients that are all looking to switch their data in the cloud. Cisco has just found a decade of cross-selling opportunities right there. The company is currently building subscription-based services, with 33% of its revenue already coming from recurring services. Second, Cisco shows strong growth coming from wireless, security, and data center products. The demand for such solutions will continue to be strong in the upcoming years. Third, the company intends to repatriate $67 billion in cash as a shareholder Christmas-in-advance gift. The dividend has been increased by 14%, and management will buy back for $25 billion worth of shares.
2) Apple (AAPL)
What? Apple isn’t #1 in my ranking? How can this happen? The world's largest smartphone company doesn’t deserve the first spot, mainly due to everything that goes around with potential trade war with China. Still, Apple is an amazing business.
First, its smartphone business will continue to drive lots of cash in the upcoming years. This cash flow is being banked to offer unique dividend growth potential for shareholders. The company will obviously use this money to develop other services. Second, speaking of which, Apple offers a wide variety of services that blends with its existing products. Apple TV, Apple Pay, Apple Music, iTunes, App store - just to name a few - are now generating double-digit revenue growth quarter after quarter. Third, do not underestimate Apple. Over the past 15 years, it has built a strong innovation platform. The company invests massively in its future (automotive, virtual reality, live TV). Shortly, Apple will not just be the “iPhone company” anymore.
1) Microsoft (MSFT)
My first place belongs to an icon of the tech industry: Microsoft. Many investors think the company's future is linked to the PC world. Considering PC sales are sluggish, this isn’t good news. However, I respectfully disagree with them. MSFT has successfully transformed its business and found several new growth vectors.
First, it moved from a one-time software sale to a subscription-based model. With Office 365 (revenue up by 41% last quarter), MSFT doesn’t have to convince its clients to buy its new version of Word (again!) anymore. We all pay our yearly subscription like any other bills without noticing. This will become a real cash cow in the future. Second, the company has successfully integrated various solutions to its business products offering. Strong ties with Corporate America have opened MSFT to a world of cross-selling possibilities. The company has successfully integrated services like Skype and Teams to its productivity suites. It is positioned to be the #1 business productivity solutions provider. Third, MSFT is also thriving in the cloud business. With Azure, its public cloud service, showing 90%+ revenue growth for 10 consecutive quarters in a row, we can say that there is a place for a number 2 behind Amazon's popular AWS service. Better still, even AMZN showed strong margins in this sub-sector!
Why not IBM?
Why do I refuse to include a 4%-yielder in a sector that rarely shows 3%-yielding stocks? Big Blue is probably one of the most generous dividend payers (yield-wise) in the tech sector. Unfortunately, there is a sad reason to justify such high yield. The company has taken 22 quarters to finally show revenue growth. I often compare IBM to MSFT to explain what is happening.
The problem with IBM is that its core business is slowing down faster for its growth vector (cloud business) to pick up. For example, if there is space for a number 2 in public cloud service, I doubt the #3 or #4 will make lots of money here. It’s like ranking 4th in a Google search - you will only get about 5% of all clicks (source).
I’m not saying IBM will go bankrupt in 5 years from now. What I’m saying is that the company has become an old and steady dividend payer without much growth opportunities. Therefore, if you are looking for a higher source of income, IBM could be a good pick. In my situation, I prefer aiming at companies showing both stock and dividend growth potential.
What about you, what are your favorite divvy tech stocks? Anybody owns some Seagate Technology (STX) and enjoyed its nice run on the market lately?
Seriously, if you made it this far, it’s because you liked what you read. Don’t be a stranger; leave a comment and tell me what you think! I’m asking you one more thing; click on “Follow” button (it’s orange, you can’t miss it!) and you will get notified each time I write a great piece like this one.
Disclosure: I do hold ADI, INTC, MSFT, TXN, CSCO, AAPL, and V in my DividendStocksRock portfolios.
This article was written by
Analyst’s Disclosure: I am/we are long ADI, INTC, V, AAPL, TXN, CSCO. 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.
The opinions and the strategies of the author are not intended to ever be a recommendation to buy or sell a security. The strategy the author uses has worked for him, and it is for you to decide if it could benefit your financial future. Please remember to do your own research and know your risk tolerance.
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Comments (41)
Cheers,
Apple also has less operating income since 2015, pays only a small dividend, but it's a lot cheaper stock so it could see more upside than Microsoft.
So if I were deciding which one to buy here it would be Apple and I would make it #1.
MSFT Payout ratio as of close of business 4/10/18 is 46.3%, Not sure what data led you to believe a payout ratio over 100%.
· GAAP diluted loss per share was $(0.82) and non-GAAP diluted earnings per share was $0.96
· GAAP results include a $13.8 billion net charge related to the Tax Cuts and Jobs Act (TCJA)With a quarterly dividend of $0.42, the payout ratio is not 100%, but 46.3% as @Sootrd mentioned.Cheers, Mike
I do own 4 companies from the list.
Good investing
I would surely put it on the top of that list.
Btw, a list of your top 10 international Divvy Tech companies would be very interesting as well...
Good investing.
Good investing.
Cheers,
It will remain to be seen how these tech giants will survive/increase their dividend growth through next recession, if anything strikes in next couple of years.
LONG - MSFT, CSCO
Look at QCOM which was takeover target by AVGO.
If companies like AVG take over QCOM, the combined entity will not be paying half the dividend that QCOM pays.
HP was a big name just few years back now divided in two or more entities. YHOO is merged with VZ. FB is dealing with data privacy issues.
Any of the above scenarios may jeopardize the credibility of the company as well as the reason for suspension / termination of their dividends.
~V
