Dividend stocks hold a prime position in any retirement portfolio as these stocks can provide you with a steady stream of income. There are several ways to go about picking dividend stocks and the foremost method is to select stocks with high dividend yields.
However, relying solely upon one metric is not advisable, as a stock may have a high dividend yield merely because of falling market price. Apart from this, I also look at the dividend payout ratio of the stock as it helps me determine whether the company is likely to maintain or improve its dividend performance in the future.
As a rule of thumb, a lower dividend payout ratio offers a company more room. Also, I take dividend growth rate into factor, which provides an extra check that the company is likely to continue with its current dividend payment policy.
So, here are my top two dividend picks which deserve to be in every retirement portfolio
Seagate Technology PLC (NASDAQ:STX) has an impressive dividend yield of 3.42%. Another attractive point about the stock is low dividend payout ratio of 21%, which signals that the company has plenty of room to further increase its dividend.
The company deals in HDDs and SSDs and is currently going through a tumultuous period, owing to declining demand of local storage devices in the post-PC era.
The company announced 21% decline in revenue for its latest quarter, which was mainly due to deterioration of Average Selling Price of storage devices as the supply side picked up after a period of production slump due to floods in Southeast Asia. The stock is still trading at very attractive P/E ratio of just over 7.
Cloudy outlook
Seagate Technology PLC (NASDAQ:STX) faces direct threat from the emerging cloud storage trend. Cloud computing is still in the nascent stage but it is all set to grow exponentially in the near future and every new iteration of cloud computing will act as a nail in the coffin of local storage devices. Seagate is justified in fearing the trend.
Seagate Technology PLC (NASDAQ:STX) is also participating in the trend as it recently infused funds in a cloud-centric startup, Cloudscaling. The company collaborated with Juniper to contribute $10 million to the startup firm. Cloudscaling uses OpenStack cloud platform and mainly targets enterprise segment. It currently counts LivingSocial and Ubisoft among its clients.
Stiff competition
Seagate Technology PLC (NASDAQ:STX) faces tough competition from various companies including Western Digital Corp. (NASDAQ:WDC), which is consistently augmenting its position in the SSD and hybrid segment. The company recently collaborated with SanDisk Corporation (NASDAQ:SNDK) for launching a new hybrid disk drive and is likely to poach market share from Seagate.
It is also planning to launch a thin form hybrid drive with mere 2.5 inch thickness. However, Seagate Technology PLC (NASDAQ:STX) also recently introduced its retail user oriented SSD 600 and SSD 600 Pro and seems ready to face Western Digital’s challenge.
Bottom line
Despite the worries about its long term future, Seagate is a good dividend investment candidate. Apart from impressive valuation, it also boasts of solid margins. The company has been consistently boosting its gross margin and is likely to keep up the trend. Seagate also has a dominant position in the SSD segment, so while the HDD segment faces decline in demand, the company is in a position to counter the effects.
As for the advent of cloud, while it may temper consumer level HDD demand in the short run, but eventually, the data needs to be stored somewhere, which would be enterprise centric HDDs. Seagate, in this situation, is destined to remain an attractive investment option as it works towards augmenting its position in the enterprise HDD segment and the SSD segment.
