Tech companies normally are not in the area where income investors would invest. But since the burst of the tech bubble a decade ago, the stocks of these tech companies never recovered, even as they continue to grow their revenue and earnings. In many cases they generate a lot of cash, and do not find enough investment opportunities to deploy the cash. Therefore they return these cash to shareholders in dividends. The payout ratios are small and there are tremendous potential for dividend growth. The Companies we want to highlight here are familiar names: Intel (INTC), Microsoft Corporation (MSFT) , Applied Materials Inc. (AMAT), and Canon Inc. ADS (CAJ).
Who would think that Intel became a dividend stock 10 years ago? But the stocks of the chipmaker now yield almost 4%. Over the past 5 years Intel consistently increase its dividend and grew its dividends 12% a year.
Even with two recessions in the last decade, Intel never stopped growing. Its revenue grew from $26 billion in 2001 and $48 billion in 2010. In the meantime, Intel used the cash to buy back shares and increase dividends. For the last 12 months, Intel paid 68 cents in dividends.
Intel operates in high profit margin and generated $16 billion of operating cash flow. This is far more than they need to invest in business. So the company has been acquiring smaller tech companies in service area. The latest acquisition is McAfee, the anti-virus company, for $7.86 billion. The acquisition was easily funded by the operating cash flow. Intel spent $3.7 billion to pay dividend last year. The dividend payout ratio is only about 30% of the earnings. With this low payout ratio we can safety assume that Intel will continue to raise its dividends, both from earnings growth and the increase of dividend payout.
The chart below is from the 10-year valuation page of Intel. We can see that Intel now has almost the highest dividend yield in its history:
Intel is widely owned by our Gurus. Markel’s Tom Gayner owns more than 467 thousand shares, an increase of 77% from the previous quarter. It is also in the portfolio of Joel Greenblatt, who looks for magic formula stocks. George Soros owns 238 thousand shares, too.
Microsoft Corporation (MSFT)
Microsoft is in a similar situation as Intel, out-of –favor from tech investors who have now piled into the likes of Apple (AAPL), LinkedIn (LNKD) etc. Microsoft stocks do not yield as much as Intel’s. But it announced lately it will increase dividend by 25%.
Some investors were disappointed by the dividend hike. But Microsoft has most of its cash in foreign countries and it may not make sense to bring the money back to the US paying taxes and then pay dividends. Investors have underestimated the growth of Microsoft. The giant company has been able to grow its revenue and earnings by more than 12% a year. With its high profit margin and low capital spending, the company is flooded with cash. Dividend payout is only about 20% of the operating cash flow. In the meantime, the company is sold at close to historical low valuations and highest dividend yield.
Applied Materials, Inc. (AMAT)
In March 2000, Applied Materials, Inc. stock was traded at $55 and did not pay dividend. Today it is traded at $10.5 with a dividend yield of 3.1%. Applied Materials develops, manufactures, markets and services semiconductor wafer fabrication equipment and related spare parts for semiconductor industry. It is out of favor just as Microsoft and Intel. The company now grows at about 7% a year on average. It can generate $2 billion a year in cash. Dividend payout is only about 20% of the cash flow from operations.
When investing for dividends, investors should not only pay attention to the yield itself. They should pay close attention to the dividend payout ratio and the growth potential of the dividends. With this low dividend payout, we have a lot of margin for dividend growth.
Currently Applied Materials stock has the highest yield in its history.
Canon Inc. ADS (CAJ)
With the slow growth in Japan, camera make Canon (CAJ) was able to double its revenue from international market in the last decade. The company now generates more than $7 billion in cash flow a year. This is much more the company needs in growing its business. It is using the extra cash paying dividends. Dividend a share grew more than 1300% in the last 10 years. Now paying $1.43 a share a year, the stock yields at 3.2%.
Similar to Intel, Microsoft and Applied Materials, Canon enjoys an extremely low payout ratio. This leaves a lot of room for the company to grow its dividends. Currently the yield is at historical highs.
Canon is in the portfolios of long term value shops Tweedy Browne and Charles Brandes.
For more dividend stock ideas, go to Dividend Stocks page. This page lists the stocks that yield at least 4% in gurus’ portfolios. It also lists the companies with high predictability rank and high yields.