Investors have long sought out dividend-paying stocks not only for the income, but also for their superior returns.
This is especially true when dividend payers up their payouts each and every year.
Silicon Valley arrived relatively late to the “dividend game.” But now, thanks to all the cash the top tech companies have built up since the end of the financial crisis – and pressure from activist investors to spend it – the Valley is in big.
In fact, many of the Valley’s top companies are well on their way to becoming dividend royalty – stocks that increase their dividend annually for many years in a row.
And that’s good news for tech investors like you, because the value of dividend stocks tends to rise steadily over the years. So like I said on May 10 – when I recommended First Trust NASDAQ Technology Dividend Index Fund (NYSE: TDIV) as a “one-stop” play on this emerging trend – dividend payers should become a part of your tech investing portfolio.
Now, let’s take a deeper dive and take a look at five tech firms with a solid track record of dividend growth. Only the healthiest, most stable companies can raise their payouts over many years.
There’s More to Tech Than Growth
Let’s start by clearing up a misconception that many investors have about the tech stocks. They often think that revenue growth and share-price appreciation are the only factors to consider.
As important as growth is, if you ignore dividends and the cash they create, you’re missing a big part of what’s happening with tech today. See, because they are awash in cash, many firms are now linking their growth to shareholder payouts
That means your investment portfolio is rising in two ways… because growth and income are linked.
Many tech leaders have high profit margins and are now swimming in cash, making the sector a great place for dividend growth. Over the past 12 months, just the tech firms in the S&P 500 paid out $59 billion in dividends.
What’s more, tech firms in the S&P 500 held $504 billion in cash at the end of 2015, or 30% of the $1.7 trillion held by U.S. firms. That gives the sector plenty of cash to keep boosting dividends.
Even for younger investors, it pays to add Silicon Valley’s budding Dividend Aristocrats to your core long-term holdings, because the compounding over time can be huge. Dividends that are growing by 7% a year will double in a decade.
To get started, take a look at these five tech firms with a history of strong – and sometimes spectacular – dividend growth.
Tech Dividend Grower No. 1: 3M
You know its adhesive tape and Post-it notes. But 3M Co. (NYSE: MMM) also has significant roles in healthcare, energy, manufacturing, climate control and electronics.
It is a quiet giant – but it has significant reach and depth around the globe.
In the current slow-growth economy, 3M is a great choice, because it isn’t about just one product. It has products for a variety of needs. That could be why 3M stock is up 13% year to date.
There may be vagaries in revenue due to the strength of the U.S. dollar, but 3M has been down this road many times before and it knows how to succeed, regardless of market conditions.
Its five-year average dividend growth rate is a whopping 15% – or more than six times that of U.S. GDP growth over the last few years. And it ranks as a Dividend Aristocrat, a firm that has boosted payouts for at least 25 years.
It has raised its dividend every quarter since Dwight D. Eisenhower was president back in the early 1950s.
Tech Dividend Grower No. 2: Honeywell
Honeywell International Inc. (NSYE: HON) is one of those tech firms that you forget how long it’s remained at tech’s cutting edge. It has been on the scene since 1885, when it invented the forerunner of today’s thermostat.
Then it invented hot-water heaters around the turn of the 20th century. Even better, it partnered with Raytheon Co. (NYSE: RTN) to develop computers… in 1955. It also was crucial in NASA’s space and satellite programs in the 1960s and ’70s.
This growth-minded company continues to build on its past. It now sees itself as a “cyber industrial company,” meaning it blends software with physical products for the Internet of Everything. More than half its 22,000 engineers are working on software.
And its dividend growth rate also looks great. Last year, it was whopping 15%. For the past three years, dividend growth has averaged 12%.
Tech Dividend Grower No. 3: Johnson & Johnson
Few healthcare companies are as diversified and established as Johnson & Johnson (NYSE: JNJ). And few can match its dividend growth.
The firm has raised its dividend every quarter since 1963. That’s 212 straight quarters. And it’s not just bumping the dividend up by a tiny bit every time. Its five-year average dividend growth stands at a 6.8%.
And much of its long-term success can be attributed its smart diversification. Of course, it’s famous for such consumer brands as Tylenol, Band-Aid, Listerine, Neutrogena and Benadryl.
Here’s the thing tech investors need to keep in mind. The consumer division made up just 20% of sales last year. Drugs accounted for 45% of revenue, and medical devices made up the other 35%.
Johnson & Johnson also boasts a great pipeline of drugs. For instance, its new autoimmune drug Remicade made up 20% of pharma revenues last year. This is a strong competitor with Humira, the best-selling prescription medicine on the planet.
The stock is up 12% for the year, and when you tack on a 2.8% dividend, it remains in pretty elite company.
Tech Dividend Grower No. 4: Verizon
Verizon Communications Inc. (NSYE: VZ) is the former Bell Atlantic of the old Ma Bell telecom system – and it’s been making payouts since long before smartphones and the wireless web.
Today, it’s a bona fide tech leader and ranks as the nation’s leading mobile carrier. The firm also is at the leading edge of installing fiber-optic cable for the superfast broadband connections needed for ultra-high-definition TV streaming.
Now, it’s looking to consolidate its power and begin offering content – web and television – as well as services. Last year, it bought internet pioneer AOL – and Verizon just announced it’s looking to buy the web assets of Yahoo Inc. (NASDAQ: YHOO) for $3 billion.
If the Yahoo bid works out, Verizon will have a strong presence on the web and a lot of content outlets for growth.
In the past 12 months, Verizon’s dividend growth rate was a solid 3%, and virtually identical for the three- and five-year periods. Year to date, the stock is up more than 11%, and it’s throwing off a hefty 4.4% dividend yield.
Tech Dividend Grower No. 5: Apple
You can’t put together a list of great dividend-paying tech companies without including the biggest market-cap stock of all time.
Yes, Apple Inc. (NASDAQ: AAPL) has come under pressure this year on concerns about slowing growth in China’s smartphone market. But Apple remains a cash machine with $200 billion on hand and a steady 2.3% dividend.
One crucial piece of information that was overlooked in the stock’s selloff was the massive conversion rate of Chinese Android users to Apple products. Conversions were up 40% September through March, compared to the same period a year ago.
Apple’s dividend is relatively new. So, we don’t have the kind of long-term growth we’ve seen from the other four firms. However, in the past year, dividend growth has averaged 10%.
That’s a very good number, and it’s a strong bet that Apple can keep that kind of growth going for a long time, regardless of market conditions.
Two Is Better Than One
The bottom line here is that dividend growers give us two areas of growth in a single stock: cash income and share-price appreciation.
Tech is no doubt the most dynamic sector in the marketplace today, and its revolution is closer to its beginning than its end. And these great stocks will be there, year in and year out, driving innovation forward.
And their dividends mean they’ll be the home of the easiest money you make in stocks. And if you reinvest the dividends, you can grow your portfolio through the “magic” of compounding.
Now, when you’re ready to kick back this summer – and going forward… forever – you can sit back and enjoy the cash from your well-stocked tech dividend portfolio.
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