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My Favorite Unloved, Overlooked Dividend-Paying Stock Sector in 2013

April 24, 2013 | About:
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taipanpublishing

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You don't typically see investors rally behind a type of investment that just had its tax rates rise. But 2013 is not a typical year.

In January, Congress and President Obama agreed to raise taxes on dividends and capital gains for the top bracket from 15% to 20%.

But instead of big sell-offs and dividend cuts, US stocks had a tremendous first quarter. The S&P 500 rose 10%. And S&P 500 companies raised their dividend payments by 12%, compared with the fourth quarter of 2012.

The reason stocks did so well, of course, is because of the lack of decent alternatives (near record low interest rates for bonds, savings accounts and bank CDs). Investors have no choice but to pay 5% more in taxes and take whatever yield they can get in the stock market.

From the viewpoint of publicly traded companies, there's huge value in offering large dividends. That's been the trick to attracting investor money so far this year.

But not all sectors are the same...

Take consumer staples, utilities and telecoms – traditionally, the big three sectors, in terms of dividend yields. Year to date, they are up 15.5%, 14.7% and 12.7%, respectively. If you've been buying up these kinds of lucrative dividend-paying sectors through stocks such as The Procter & Gamble Co. (PG), Duke Energy Corp. (DUK) and AT&T Inc. (T), you're probably doing great right now.

But there is one high dividend-paying sector that's ignored by the vast majority of investors. And that's because no one would ever suspect it of being a great dividend payer.

I'm talking about the technology sector...

Historically, tech has been one of the weakest sectors terms of dividend yields. After all, technologies take a lot of research and development investment to produce... often leaving little left over for shareholders.

But that's changing. In today's environment, although big tech companies still have to plow funds into R&D, there are enough major tech companies that can now afford to fund R&D and pay out dividends to shareholders.

Last year, the tech sector paid more in dividends than any other sector in the S&P 500 for the first time ever. Many tech stocks still have relatively low dividend yields... and much of this dividend growth is still coming from only a handful of the biggest tech names.

But there are opportunities out there. Investors just haven't caught on that this could be the only major dividend-paying industry left.

Take a look at this chart from Bespoke Investment Group. It shows the returns for each of the major sectors of the S&P year to date.

042213sector.jpg

Besides health care, sectors known for their massive dividends top the list of returns. Investors are out of love with tech stocks.

The implications seem obvious to me. And soon they will become obvious to everyone else. If traditionally high dividend-paying sectors are overbought... and the unloved the tech sector is now the best-paying sector for dividends... that's what you should be buying.

And there are plenty of specific opportunities here...

Take Cisco Systems Inc. (CSCO), a world-leading business technology provider. If you work in an office, there's a good chance you have a Cisco phone on your desk. Cisco may be the most important company to modern-day business.

As you can imagine, Cisco's R&D budget is big – about $5.5 billion per year. But because of its size, market share and focus on profit margins, the company has enough left over to reward shareholders in the form of dividend payment.

So in 2011, it paid its first quarterly dividend of 6 cents per share. Last year, Cisco raised its dividend payments – twice. And so far this year, it increased them once again.

Right now, Cisco pays a quarterly dividend of 17 cents. This gives it a 3.3% dividend yield. Compare that to yields on dividend payers everyone seems to be jumping on right now such as the Colgate-Palmolive Co. (CL), which yields 2.3%, and The Coca-Cola Co. (KO), which yields 2.6%.

Cisco's years of dividend payments are hardly a long track record. But if you're looking for dividend income in the current year, it's one of your best bets – and one of the only ones left.

Sincerely,

Jim

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