The Surprising Hiding Place for Top Dividend Stocks

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Dividend stocks have a reputation for being conservative, slow-growth companies that don't have much in the way of future prospects. Traditionally, sectors like the utility industry and the consumer goods business have appealed to dividend investors because of their high yields and the stable business models of the companies in those sectors.

Recently, though, demand for solid dividend-paying investments has climbed so high that many of the traditional havens for dividend stocks have gotten more expensive than usual. By contrast, one area of the investing world where dividends historically weren't available has surfaced as a vital breeding ground for solid payouts. Let's take a look at the technology sector and why more dividend investors than ever are looking to tech stocks as viable income-producing options in their portfolios.

Why Tech Dividend Stocks Are Such a Shock

For a long time, the concept of a technology-sector dividend stock would have seemed like an oxymoron, as very few of the hottest tech stocks paid any dividend at all. During their heyday in the 1990s, up-and-coming growth companies in the tech sector, including Microsoft (MSFT), Cisco Systems (CSCO) and Oracle (ORCL), never paid any dividends at all. Even those that did, such as Intel (INTC), typically made only minimal token payments to make their shares eligible for purchase by money managers who were required by their fund charters to buy only income-producing investments.

The reason tech companies were so stingy with their money was that they had huge growth potential and needed every dollar of available capital to plow back into their businesses. By voraciously using up all the cash flow that their businesses generated, tech stocks were able to accelerate their growth without resorting to high-priced loans or other sources of capital.

After the 2000-02 tech bust, many tech companies realized that their business models were stable enough to support regular dividend payments. Microsoft implemented a regular dividend for the first time in 2003, and slowly but surely, other companies followed suit. Apple (AAPL) made its first dividend payment in 17 years in 2012, and Oracle and Cisco joined the crowd by implementing regular dividends in 2009 and 2011, respectively.

No Shortage of Great Dividend Yields

What's even more surprising than tech stocks paying dividends is just how high the yields are that many of these stocks pay. Many big-name tech stocks pay yields that are higher than the overall stock market average, showing just how much disposable cash these companies have available to distribute to shareholders.

For instance, Microsoft and Intel both have yields of roughly 2.5 percent, and those numbers were actually substantially higher until both stocks recovered so sharply over the past year. Cisco Systems has a yield that approaches 3 percent. Apple's yield was similarly impressive until its huge bull-market run in 2014, yet even now, a payout of 1.6 percent is a nice bonus on top of the roughly 60 percent gains in Apple's share price since the end of January.

One big reason tech stocks have become dividend powerhouses is that they've grown so large that they no longer have as many potential investments upon which to deploy their huge cash hoards. Although tech stocks often implement stock buybacks to return unneeded capital to shareholders, the demand for dividends has led them to adopt the new approach toward their capital. Moreover, these companies are far from stodgy, no-growth businesses -- they have the capacity to produce growing cash flow over the long run.

In addition, if you go a bit further afield, you can find tech stocks with even higher yields. Seagate Technology (STX) is well known for its hard-disk-drive products, and it has benefited from the renaissance in the PC market in 2014. Yet Seagate has also moved into solid-state-drive products, and that could give it some solid growth to match its high dividend yield.

Look to Tech Stocks for Dividend Security

Industries that are perceived as being safer will always have appeal to some risk-averse investors, and relying on top consumer goods and utility stocks to provide income won't go out of style anytime soon. But if you haven't taken a look at tech stocks lately, you might be surprised to discover the rich dividends that are available even from the sector's best-known companies.

Motley Fool contributor Dan Caplinger always likes to find great things in hidden places. He owns shares of Apple. You can follow him on Twitter @DanCaplinger or on Google+. The Motley Fool recommends Apple, Cisco Systems, and Intel. The Motley Fool owns shares of Apple, Intel, Microsoft, and Oracle. To read about our favorite high-yielding dividend stocks for any investor, check out our free report.
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