Dividend growth investing is a powerful and time-proven approach to selecting long-term winners for your portfolio. The tech sector has traditionally been overlooked by dividend growth investors, but the industry has changed materially over the last years, and these three tech companies are offering serious dividend growth potential over years to come.
IBM
International Business Machines Corp. (NYSE:IBM) is arguably the most mature company in the tech business; the company decided to move away from the commoditized hardware business back in the nineties, prioritizing margins and free cash flows over revenue. This has done wonders for the company in terms of profitability, and IBM has achieved a remarkable track record of 18 consecutive years of dividend increases.
Since 2000, IBM has returned over $150 billion to shareholders in the form of dividends and share repurchases, considering that the current market cap is around $223 billion, investors will be handsomely rewarded if the company continues distributing capital in such a generous way.
The company is reporting disappointing revenue growth due to lackluster corporate spending in the last quarters. But IBM is the third most valuable brand in the world according to Interbrand and it counts each of the Fortune 2000 companies as clients, so it has the strength to withstand economic headwinds.
IBM has a rock-solid leadership position in its industry, and the company has proven that it knows how to adapt to changing technologies and industry trends. Besides, the payout ratio is below 25%, so IBM has plenty of room to continue increasing capital distributions over the next years
Qualcomm
While device manufacturers like Apple and Samsung are aggressively fighting each other for dominance in the mobile computing industry, QUALCOMM, Inc. (NASDAQ:QCOM) is in a very comfortable position as a leading supplier to the major players in the industry.
The company is a key provider of digital wireless telecommunications products and technologies based on its code division multiple access (CDMA) technology among other products and services. Qualcomm is deeply integrated into Apple’s iPhone and iPad products as well as many Android-based devices, including the best-selling products from Samsung, so it’s positioned for growth under different competitive scenarios.
As the mobile revolution expands to emerging markets Qualcomm will face some margin pressure as lower-priced devices gain market share. On the other hand, the company will benefit from the transition toward 4G/LTE over the next years as many smartphones and tablets will be compatible with 4G/LTE and 3G at the same time.
The transition process is still in its first stages on a global basis, and products need to offer adaptability. This means that Qualcomm will continue making money from its 3G and its 4G/LTE patents for quite some time.
Qualcomm has increased its dividends for 11 consecutive years in a row, including a big boost to its capital distribution program back in March when it announced a 40% increase in dividend payments and a new $5 billion stock repurchase program. This brought the annual dividend payout to $1.40 per share, which means a dividend yield around 2.3% at current prices. The payout ratio is at a healthy 28.5% of earnings.
Accenture
Accenture Plc (NYSE:ACN) is being hurt by the same factors affecting IBM, lackluster corporate spending has produced disappointing sales growth at this global leader in consulting and technology services. However, just like IBM, Accenture has a remarkably profitable business model which generates plenty of cash flows for shareholders, operating margin increased to more than 14% of sales in the last quarter.
Accenture is a truly global company with more than 200 offices in 53 countries; it serves 89 of the Fortune Global 100 and more than three quarters of the Fortune Global 500 members. The company has been an early mover in the global outsourcing trend and it has built a leadership position in that business over the last years.
Management has a strong commitment to capital distributions, not only when it comes to dividends but also via share buybacks. Accenture has reduced its share count by more than 27% over the last ten years and it has a remaining authorization to repurchase approximately $3.0 billion in stock.
The company has a rock solid balance sheet with $5.9 billion in cash and equivalents and no debt, and the payout ratio is remarkably low at 16.4% of earnings. Accenture has a relatively young history of dividend increases with 8 years of growing dividend in a row, but the company has the fundamental strength to continue raising payments for years to come.
Bottom line
The tech industry has changed over the last years and many companies have built reliable business models generating big and recurrent cash flows for shareholders. When it comes to looking for the best dividend growth stocks for your portfolio, these three technology companies deserve some serious consideration.
The article 3 Tech Companies for Dividend Growth Investors originally appeared on Fool.com and is written by Andres Cardenal.
Andres Cardenal owns shares of IBM and Qualcomm. The Motley Fool recommends Accenture. The Motley Fool owns shares of International Business Machines and Qualcomm.
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