Hefty Dividends in the Tech Sector
Dividends are a great thing: immediate cash that you can use to cover expenses or reinvest in more stocks. Unfortunately, for a long time, the attitude among Silicon Valley-types was to avoid paying dividends. With Apple's (NAS: AAPL) recent dividend announcement, that foolish notion has been put away. There has even been speculation about Google (NAS: GOOG) instituting a dividend. To celebrate this new era of technology dividends, I've found three technology companies with attractive yields and solid prospects.
Mr. Softy serves a growing yield
With Apple's stock on a tear, it's easy to forget about tech behemoth Microsoft. Sure, Apple's growth in mobile, tablets, and Mac PCs is a threat to Microsoft's well-established monopoly. However, there is still money to be made in Microsoft stock. The company generates a healthy amount of cash -- more than $27 billion over the past year alone. Management is paying out a portion of that cash now via a 2.5% dividend, and I expect the dividend will grow. The payout ratio (dividends divided by earnings) is only 25%. Since 2007, management has doubled the quarterly dividend from $0.10 to $0.20. I'd be surprised if, over the next five years, the dividend doesn't double again.
Cashing a 4.1% Paychex
Paychex (NAS: PAYX) provides payroll solutions for small businesses. Although it sounds boring, it's actually a very exciting business for one reason: cash. The business generates prodigious amounts of cash with minimal capital spending requirements. Over the past 12 months, the company generated $725 million in operating cash flow with only $84 million in capital expenditure. In other words, free cash flow (operating cash flow minus capital expenditure) was $641 million. Management is wisely using free cash flow to pay shareholders. The current dividend yield is 4.1%, and management has generously increased the quarterly dividend (100% since 2006). Additionally, if you find payroll processing as interesting as I do, you may want to look at Automatic Data Processing (NAS: ADP) . ADP, which boasts a 2.8% yield, provides similar services as Paychex but with a focus on larger customers.
Finding its way to a 4% yield
Navigational-equipment maker Garmin (NAS: GRMN) sports a hefty 4% dividend. Critics will advise treading with care here. I'll admit that the iPhone and Google Maps certainly pose a threat. However, I'd point out that Garmin's mobile and auto navigation likely won't die quickly. Last quarter, revenues from that segment grew 4%, instead of declining as critics expected. Additionally, the company has other fast-growing segments like fitness, outdoor, and marine. As a result, total revenue grew 9% last quarter. The payout ratio of 60% is reasonable, and the company has $1.4 billion cash with no debt. Considering that, the dividend looks safe.
Looking beyond tech
I like dividend-paying tech stocks, but they shouldn't be the only thing in your dividend portfolio. It's a good idea to spread your stocks across sectors to reduce risk. If you're constructing a dividend portfolio, I'd take a close look at all three stocks above. But I also recommend taking a look at one of our newest special free reports: "Secure Your Future With 9 Rock-Solid Dividend Stocks." It details a group of dividend stocks, including familiar blue chips and some you may not have heard of, that you can count on to pay you back for decades to come. Click right here to get it.
At the time this article was published Brendan Mathews owns shares of Apple. The Motley Fool owns shares of Apple, Google, and Microsoft.Motley Fool newsletter serviceshave recommended buying shares of Microsoft, Automatic Data Processing, Apple, Google, and Paychex.Motley Fool newsletter serviceshave recommended creating bull call spread positions in Microsoft and Apple, and creating a write covered straddle position in Paychex. The Motley Fool has adisclosure policy.We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter servicesfree for 30 days.
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