With interest rates on the rise during the past week or so, the technology sector has experienced a rather severe short-term sell-off. It appears that the Federal Reserve is causing the market to begin to shift to risk-off mode. Granted, this could all be short-lived if Jerome Powell & Co. would simply mention that they’re planning on being data dependent, so I’m not sure if it’s time for investors to get all up in arms.
Pullbacks are healthy for long-term bull runs. They remove weak hands from the market and increase skepticism which stops exuberance from taking valuations to truly irrational places. But, this piece isn’t about whether or not the Fed is going to cause a market crash. I don’t have the slightest idea. No, this piece is about the top technology names that I like as a dividend growth investor.
When most investors think about technology, I imagine the F.A.N.G. names, or maybe the highly followed Chinese internet names like Alibaba (BABA) come to mind. In other words, technology is where investors head for growth. However, that isn’t to say that income-oriented investors should avoid the sector. Actually, technology is my favorite place to invest as a dividend growth investor. All of the sales growth that blue chip technology companies produce oftentimes leads to strong/predictable EPS growth.
And this EPS growth can lead to strong dividend growth once companies decide to start returning cash to shareholders. Yields typically aren’t high in this space, yet I’ve prioritized yield when putting together this list. The tech space oftentimes carries high valuation multiples and if rising rates create a buying opportunity, investors need to be ready. Hopefully, this piece can serve as a jumping off point for due diligence for those interested in passive income and technology exposure.
#1: Apple (AAPL)
The top spot on this list was an easy decision for me. Apple is my largest holding, making up approximately 10% of my portfolio. There isn’t a company in the world that can compete with AAPL’s cash flow generation and its generosity to its shareholders (earlier this year, AAPL announced that it was planning on returning $100b to its shareholders in the form of dividends and buybacks in the short-term). AAPL doesn’t have the long dividend growth history that many DGI investors might be looking for, but then again, I suppose that’s going to be the case for many stocks on this list.
For the most part, even the mega-cap tech companies aren’t that old. Apple hasn’t been mature for long enough to have a multi-decade dividend growth streak. However, I wholeheartedly expect for it to become a dividend aristocrat in the future. During the trailing 12 months, AAPL’s sales are up more than 10% and its EPS growth is over 20%. Apple’s P/E multiple is on the rise, trading up to its highest level in nearly 10 years at ~19x.
This rise is due to the success of AAPL’s high margin, reoccurring services segment, which is becoming a much more significant piece of the revenue pie. This diversification away from hardware sales (namely, the iPhone) has eased investor concerns regarding AAPL being a one-trick pony. AAPL initiated its dividend in 2012 and has provided investors with ~10% annual growth since then. I expect this double-digit dividend growth trend to continue for quite some time, which is why AAPL is the #1 stock on this list, even though its yield is relatively low at just 1.3%.
#2: Microsoft (MSFT)
Up next we have one of the old guard members of the tech community, Microsoft. This company’s resurgence under CEO Satya Nadella is nothing short of amazing. It wasn’t all that long ago that investors and analysts alike had left MSFT for dead, assuming its legacy cash flows were destined to dry up as the PC market failed.
Well, flash forward to today and MSFT has viewed as a global leader in the cloud space, the gaming space, social media, AI, security, you name it… oh, and it still has those strong legacy cash flows which have helped to create one of the largest cash hoards in the world and support one of the most reliable dividends in the market.
All of this exposure to high growth markets allowed MSFT to increase its sales by more than 20% during the trailing 12 months. The company’s non-GAAP EPS was up nearly 18% during that same period of time. MSFT is definitely not cheap at current levels, trading for ~28x ttm earnings. This multiple is well above MSFT’s long-term average of ~21x. Investors looking for value should probably look elsewhere, but if income is your primary concern and MSFT’s 1.65% yield meets your income-related threshold, then I think the company is definitely worth a look.
I expect MSFT to continue to post high single-digit, low double-digit-type dividend growth for the foreseeable future. It’s also worth noting that MSFT has decreased its outstanding share count by 7.6% over the last 5 years and I expect that trend related to buybacks to continue as well.
#3: Qualcomm (QCOM)
To me, the top two spots on this list were obvious. However, from 3 on down I had a hard time ranking the rest. I own a ton of tech companies, though I don’t often think about ranking them. Furthermore, I don’t always view tech through an income-oriented lens. Just about all of the tech companies that I own contribute to my passive income stream, yet that isn’t necessarily the main reason that I own them. Sure, it helps, but the primary reason that technology is by far my largest sector exposure is because I believe the companies within have the best long-term growth outlooks in the digital world that we’ve ushered in.
QCOM has had a really interesting last couple of years. The stock experienced a steep sell-off related to its feud with AAPL and others regarding its IP/licensing division, engaged in a failed M&A deal that the Chinese regulators wouldn’t approve, and then bounced back sharply because of the huge buyback that management announced once it became clear that they would not be spending their cash on NXPI Semiconductors (NXPI). Over the last couple of years, QCOM’s P/E multiple fell down to near single digit levels several times.
Right now, QCOM shares are trading at ~19x. While this isn’t cheap relative to recent premiums placed on the shares, it is cheap compared to QCOM’s long-term average P/E which sits at ~25x. And, even after its strong rebound from $50 up to $70, QCOM shares still yield 3.5%. Furthermore, this is a company well known for its double-digit annual increases. The pace of QCOM’s dividend increases has slowed a bit in recent years, but looking back long-term, there are few companies that have posted better dividend growth related performance than QCOM.
Since initiating its dividend in 2003, QCOM’s dividend growth CAGR is 26%. Analysts are expecting EPS growth to be ~20% per year during 2019 and 2020. Assuming this is the case, I think strong double-digit dividend increases continue to be likely. It’s rare to find a 3.5% yield with those types of dividend growth prospects. QCOM has issues regarding its highly profitable licensing division, but with 5G right around the corner, I think this company has strong potential tailwinds as well.
#4: Cisco (CSCO)
Cisco is a company that seems to fly under the radar. When you think about best in breed names in the current growth markets, Cisco doesn’t really come to mind. Sure, its legacy positions in the switching/router market is stellar, but that isn’t really exciting, is it? The main reason that CSCO is so high on this list is because I view it as a bit of a jack of all trades in the network/security/cloud space. CSCO has become known for its M&A maneuvers as management has made it a habit to scoop up smaller names in these growth industries.
After a bit of a growth drought in recent years, CSCO has turned things around in 2018 and it appears that these acquisitions are starting to pay off. I like the fact that CSCO is shown a willingness to use its large cash flows to invest in itself. This risk-taking is why it’s ranked #4 (there are other companies lower on this list that have prioritized buybacks with their cash flows and I think they’ve done their shareholders a disservice).
Cisco doesn’t have a very long dividend growth streak, but it has been very generous to shareholders since initiating its dividend payments in 2011, CSCO’s quarterly dividend has increased more than five-fold, from $0.06/share to $0.33/share. This represents a dividend growth CAGR of nearly 45%.
And on top of this double-digit annual growth that CSCO investors receive, they’re getting a relatively high 2.8% yield (which is well above the ~1.8% that the S&P 500 yields). And lastly, CSCO’s payout ratio is less than 50% and analysts are expecting to see EPS growth of ~10% looking forward to 2019 and 2020, so I think it’s likely that the double-digit increase continues into the foreseeable future.
#5: Texas Instruments (TXN)
Texas Instruments is the most recent purchase I’ve made in the market. I initiated exposure to TXN on Wednesday’s sell-off, locking in shares at $100.05. Honestly, I think I have a tarnished view of this company, picturing the old graphic calculators that we used in math classes in middle/high school. Obviously, this $100b company is responsible for much more than that. TXN is a world leader in the analog chip space, which is attractive because of high margins and the relative ease of production.
TXN is another company on this list known for M&A. This company’s management has done a great job in the past of scooping up high quality assets when they’re distressed, widening its moat at a discount. More recently, TXN has had managerial issues with the departure of its CEO for breaking the company’s code of conduct, but TXN maintains a deep bench and Mr. Crutcher’s isn’t a major concern for me. TXN caught my eye when they recently increased their quarterly dividend by 24.2%.
The company also recently announced that they would be adding another $12b to the buyback authorization. TXN’s historical buyback has been effective. Over the last 5 years, the company has reduced its outstanding share count by more than 9.5%. TXN has been a wonderful dividend growth story over the last 15 years or so.
Since 2004, the company’s dividend growth CAGR has been 25.8%. Honestly, I’m disappointed in myself for waiting so long to add shares of this dividend growth stalwart to my portfolio, but then again, shares have recently sold off and when buying yesterday, I was able to buy shares at a valuation that they haven’t seen in over 2 years. TXN currently sits near the top of my buy list and I’ll be happy to add to this new position should shares continue to fall. After recent weakness and the aforementioned dividend increase, TXN is yielding ~3%.
#6: Broadcom (AVGO)
Broadcom is a company that many dividend investors overlook. I’m not sure why. You’d be hard-pressed to find a company, in any sector of the market, that has rewarded investors with more generous dividend growth than AVGO in recent years. In 2016, AVGO increased its dividend by 100% and then in 2017, the dividend was raised another ~75%. That’s incredible. Obviously, this sort of growth cannot continue forever. However, for those of us who’ve been long have already seen yields on cost skyrocket. AVGO remains highly profitable and although it has made a habit of making acquisitions, I don’t think this is going to put a huge damper on the company’s dividend. AVGO’s payout ratio remains low and I wouldn’t be surprised to see another double-digit raise in 2018.
All of this is on top of a ~3% dividend yield. I know that many fear the “roll up” type story and worry that CEO Hock Tan is destroying the long-term value of the companies he purchases by severely cutting costs in an effort to reap short-term profits. Who knows, maybe they’re correct. I wouldn’t say that AVGO is a S.W.A.N. (sleep well at night) stock and because of this, I wouldn’t go overweight, but I do feel comfortable maintaining a full position because of the shareholder return story as well as Hock Tan’s willingness to invest and potentially continue to diversify this company’s revenue stream.
#7: Digital Realty Trust (DLR)
Digital Realty is a REIT, but since it focuses on data centers, I’ve decided it’s fair to include it on this list. DLR offers better growth prospects than many of its REIT brethren, which is why it has a relatively low yield. Although there have been some that had said that data centers will be made a thing of the past by smaller, more efficient chips, I simply don’t see the hardware innovation keeping up with global big data demands and I feel comfortable owning DLR, which is the largest global data center REIT.
Honestly, I don’t think there’s a lot to say about this one. It owns property near many of the major urban areas/internet hubs, it has done a fantastic job of FFO growth, and while it doesn’t give investors the strong, double-digit annual increases that many of the companies above it on the list do, DLR has made it a habit to reward shareholders with mid-high single-digit increases annually, which is outstanding for a REIT. This one isn’t fancy, but it does offer a 3.6% yield that I consider to be very safe.
#8: Intel (INTC)
Intel is a company that people love to hate. I’ve never really been sure why there is so much vitriol in the comment section of INTC-related articles, but regardless, I’ve owned shares for years and INTC has treated me just fine. INTC is a mega cap company with a 2.6% yield that is well above the broader market averages and trades with a discounted multiple of just 11.5x earnings. This is a big, cheap, generous cash cow that checks just about all of the boxes that I’m looking for in an investment.
However, the reason that INTC is so low on this list is its disappointing dividend growth history. INTC recently froze its dividend for a year and while it hasn’t been forced into a cut, it also hasn’t been greater above offering the double-digit annual dividend growth that I like to see from tech names. INTC management is investing heavily in its business to diversify itself away from the traditional PC market, hoping to make inroads in high growth areas like data center and automation.
I respect these moves, but they’ve slowed dividend growth down to the mid-single digits enough though the company has a low payout ratio. I think INTC is worthy of consideration for any DGI investor, but it’s not a name that I’m going to go overweight because I fear it won’t offer the long-term passive income stream compounding that I’m after.
#9: Nvidia (NVDA)
Nvidia is a company that many dividend growth investors probably don’t follow (or at least, not closely). NVDA made a name for itself as a top performer in 2016 and 2017. 2018’s growth hasn’t been too shabby either, though I suspect that with a $160b market cap, NVDA’s days of 100%+ annual growth are over. It’s a proven leader in the chip space related to gaming. This is a great growth industry to be a part of in itself, but I think what people are most excited about when it comes to NVDA is the potential of its artificial intelligence chips.
Because of the growth potential of A.I./automation, I wouldn’t quite say that NVDA is mature yet, though I think it’s getting here and its dividend growth story will begin to move closer and closer to the forefront of the sentiment surrounding this stock. NVDA initiated its dividend in 2013 and has since made it a habit to reward investors with double-digit annual increases. NVDA is one of my largest individual holdings, yet this stock finds itself so low on my list because of its paltry dividend yield of just 0.2%.
Granted, much of the reason behind such a low yield is the massive gains in share price that the company has produced in recent years. When I originally bought shares of NVDA the yield was more than 1%. Regardless, I know that this name won’t pass the screens of many DGI investors because of its low yield. To me, this is a long-term buy and hold type play. I suspect that NVDA could play a major role in me reaching my passive income goals, but we’re talking a decade or two into the future.
#10: IBM (IBM)
I’m sure that many are surprised to see IBM on this list. Admittedly, this company has been a dog for some time now. I suppose it’s worth pointing out that IBM has finally generated a bit of top-line growth in recent quarters though, so many things are turning around. Regardless, the company has a strong balance sheet and the share price weakness has created a high dividend yield. Since this is an article about tech names for income-oriented investors, I was hard-pressed not to include a company in the tech sector offering a 4.3% yield and a multi-decade dividend growth streak.
All negative sentiment aside about IBM’s past growth struggles, what’s not to like about those dividend growth metrics? Furthermore, IBM is very cheap, trading for ~10.5x earnings. Granted, this stock has been cheap for a while now and many believe it to be a value trap. Maybe so. Only time will tell if the recent top line growth spurt will continue or not. Admittedly, IBM is the only tech company that I own that I’m negative on, other than the Chinese internet names that have been beaten up by the trade war.
IBM has been one of my worst ever investments, yet it does pay what seems to be a very reliable, high yield and I’m sure that there are going to be income-oriented investors that are interested in this 4%+ yield. Right now, I see IBM as a bit of a deep value contrarian play with a high-yield kicker. I haven’t added to my position in years and likely won’t unless the yield touches 5%. However, I also have no plans to remove Big Blue from my portfolio because of its contribution to my passive income stream.
Disclosure: I am/we are long BABA, AAPL, DLR, AVGO, INTC, NVDA, IBM, CSCO, TXN, MSFT, QCOM.
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.