Most investors know to look for dividend payouts in familiar sectors, such as utilities or consumer staples. Dividend stocks are usually regarded as widow-and-orphan types, with big dividend yields but slow, unexciting growth from boring industries. However, over the past few years, there’s been a noticeable shift among a sector of the market that was for years known as anything but a reliable source of dividends.
After years of offering their investors little to nothing in terms of yield, technology companies are sitting on tons of cash and have begun returning it to shareholders via dividends. If you favor dividends and would like to diversify into the technology sector, you don’t need to be left out in the cold. There are some extremely well-known large-cap technology companies that are still growing and offering solid dividends along the way.
One high-yielding tech giant
Most investors know Microsoft Corporation (NASDAQ:MSFT) for its stagnating share price over the past decade. Indeed, in 2000, the stock reached almost $60 per share. After the tech bubble burst, the stock fell to less than $30, and has traded at that level ever since. However, underneath the surface, Microsoft has been one of the market’s premier dividend growth plays. Over the past five years, the company has more than doubled its dividend. Microsoft now yields 3.25%, approximately 130 basis points higher than the yield on the 10-year U.S. Treasury Bond.
In a difficult year, Microsoft Corporation (NASDAQ:MSFT) reported 2012 adjusted diluted earnings per share growth of 2%, along with 5.4% revenue growth year-over-year. Making the case even better for Microsoft is that it’s hard to argue against its valuation. Microsoft now trades for just 10 times its 2012 adjusted diluted earnings per share. Microsoft also has more than $63 billion in cash, equivalents, and short-term investments on the balance sheet. It’s fairly difficult to think of Microsoft Corporation (NASDAQ:MSFT) as anything other than a cheap, cash-generating machine with an extremely comfortable yield.
One lower-yielding tech giant with higher dividend growth
Technology companies that focus on the trend toward mobile telecommunications solutions, such as semiconductor company QUALCOMM, Inc. (NASDAQ:QCOM), are the favorite of many growth-oriented dividend investors these days. The company’s fantastic operating performance has backed up this theory. In its 2012 annual report, the company announced revenues and diluted earnings per share increased by 27% and 39%, respectively.
Qualcomm is a $112 billion technology behemoth that has seen its share price rise almost 20% since the beginning of 2012. Recently, the company announced a huge 40% increase in its dividend. Over the past five years, Qualcomm has raised its dividend by 17%, compounded annually. At current prices, the stock yields slightly more than 2%. Although QUALCOMM, Inc. (NASDAQ:QCOM) yields less than Microsoft Corporation (NASDAQ:MSFT), its dividend growth outpaces its larger technology peer.
The best of both worlds
A stock with a compelling combination of a high yield and high dividend growth is Texas Instruments Incorporated (NASDAQ:TXN). In fact, Texas Instruments recently announced it was handing its investors a double-dose of cash rewards. Not only did the company announce a new $5 billion share repurchasing authorization, but it also raised its common stock dividend by a full third. The stock’s new dividend of $1.12 per share represents a yield of 3.2% at recent prices.
Texas Instruments’ huge dividend increase isn’t a one-off, either. The company has a long track record of handsomely rewarding its shareholders through both dividends and share buybacks. Last year, Texas Instruments bought back $1.8 billion worth of shares and has repurchased its own shares opportunistically for many years. Since 2005, the company has reduced its shares outstanding by 36%. Moreover, Texas Instruments has increased its dividend by 23% compounded annually over the past five years.
The Foolish takeaway
Many of the major players within the technology sector have transformed themselves into rank-and-file dividend payers. Even inside tech, there is a mixture of companies each in a different stage of the dividend life cycle. It’s entirely possible to craft a technology portfolio that consists of higher-yielding, slower dividend-growth stocks along with those that have lower starting yields but more rapid dividend growth.
Each of these stocks offer dividend yields between 2% and 4% that are easily covered with free cash flow. Since technology stocks traditionally have low levels of debt, there’s little reason to believe these payouts can not only be sustained, but increased in the future at rates that surpass the level of dividend growth of most other stocks. Texas Instruments offers its investors a compelling mixture of a high current yield as well as extremely high dividend growth. While Microsoft and QUALCOMM, Inc. (NASDAQ:QCOM) are highly profitable and intriguing buys, Texas Instruments appears to have the edge.
The article Find Great Dividend Stocks in an Unexpected Place originally appeared on Fool.com and is written by Robert Ciura.
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