The U.S. Federal Reserve’s recent decision to push interest all the way to zero has millions of investors scrambling. Clearly, now is not a good time to be buying bonds for retirement income. Their rates also have plummeted.
And the chances that bond prices will fall when the economy recovers have shot up overnight, greatly increasing the risk of losses if you have to sell.
That leaves many investors looking for good dividend yields at a time when the economy is weakening.
Fortunately for tech investors, the sector has quietly come to dominate corporate balance sheets in terms of cash on hand.
That means two things. Firstly, tech is a great place to find yields. Secondly, these cash-rich firms are least likely to cut their dividends in a recession.
Indeed, nine tech companies in the S&P 500 alone hold more than $350 billion in net cash.
With that in mind, today I’m going to reveal three tech leaders that currently offer the safest dividend plays…
The High-Tech Dividend Revolution
Now then, as a longtime tech investor, I have to say I’ve had a sea change when it comes to dividends.
A decade ago, high-yield tech stocks were rare. Back then, Silicon Valley preferred to plow cash back into the next round of growth.
But following the financial crisis that ended in early 2009, these firms found themselves awash in cash as businesses and consumers adopted a wide range of new technologies en masse.
That change has transformed some of tech’s biggest players from laggards into dividend leaders.
So, as a service to dividend hunters, I put together a list of the three tech stocks least likely to cut their dividends as the economy slows.
I based that on their net cash on hand as well as positive cash flow. I then searched for those firms that have an S&P corporate bond rating of at least BBB, the lowest level that the marquis agency still considers “investment” grade.
That narrowed the list to three that offer yields that investors can likely count on in these challenging times. Take a look:
Tech Dividend Payer No. 1: AAPL
There’s no question that Apple Inc. (AAPL) sets the standard by which other consumer tech companies are judged. It redefined music listening with the release of the iPod and created the concept of the smartphone with the release of the iPhone in June 2007.
Along the way, it’s now setting the standard for wearables with its fifth-generation Apple Watch. But it’s not all about hardware.
Indeed, its services unit continues to ramp up sales and has become one of the company’s biggest growth engines. Apple has said repeatedly that it is targeting $50 billion in sales in the next few years.
It’s well on the way to doing so. The services have become one of Apple’s biggest growth engines based on demand for subscriptions to iCloud storage, the music streaming service, and offerings such as Netflix and HBO through iTunes and Apple TV.
Service sales in the quarter hit an all-time high of $13 billion, a yearly increase of 18%. That means two things…
- Services are already on pace to hit $40 billion in sales as early as the end of this year.
- Apple is well on its way to becoming the kind of software firm that can move well beyond its iPhone/Mac hardware legacy.
But in addition to being a leader, innovator, and a nonstop growth machine, Apple has become one of the more shareholder-friendly firms around – in tech or any other sector.
Shares currently have a forward dividend yield of 1.25%. AAPL has an S&P credit rating of AA+ has more than $90 billion in net cash on hand. It has a yearly free cash flow of $45 billion and has been doubling its per-share earnings every 4.5 years.
Tech Dividend Payer No. 2: CSCO
While we still don’t know the full extent of COVID-19’s impact on the economy and technology sales, Cisco Systems Inc. (CSCO) recently reinforced its commitment to maintaining a robust dividend.
During a Feb. 12 call with analysts, the firm said that it had raised dividends by 3%. The company said it was “reinforcing [its] commitment to returning capital to shareholders and [its] confidence in the strength and stability of [its] ongoing cash flows.”
Known for a wide range of computer networking gear, Cisco equipment got a heavy workout during the crisis as millions of employees worked from home. Primarily known as a hardware firm, Cisco has become a cloud play as of late because 72% of its software is subscription-based.
And right now, a combination of investor “short-termism” and shareholder-friendly practices has made Cisco an outstanding opportunity. Before the coronavirus was even in the picture, the stock had been sold off thanks to the trade dispute with China. This sell-off was multiplied by the market crash in early 2020.
What investors aren’t seeing is that Cisco has been aggressively paying down debt and using its cash flow to deliver higher returns for investors through its dividends.
CSCO shares currently have a forward dividend yield of 4%. CSCO has an S&P credit rating of AA- and has roughly $10 billion in net cash on hand. It has a yearly free cash flow of $11 billion and has been doubling its per-share earnings every six years.
Tech Dividend Payer No. 3: MSFT
Yes, Microsoft Corp. (MSFT) was one of the first big tech leaders to say the coronavirus would hurt current sales. But that in no way invalidates the company’s huge growth.
As evidenced by its most recent quarterly earnings report, Mr. Softy is making progress across the board. Two words sum up the breakthrough shown in the Dec. 31 quarter – recurring revenue.
Its commercial cloud computing platform, Azure, along with Office 365 helped smash expectations and send gross margins up 67%.
A Wedbush analyst who was quoted in an Investor’s Business Daily article on the report called it a “masterpiece.” A Bernstein analyst wrote, “What more could you want?”
It bears noting that this was a company stuck in neutral for many years. That is… until Satya Nadella became CEO six years ago on Feb. 4.
He reorganized and reprioritized the company. He shut down unprofitable divisions and other operations that were not adding value to the current core business or the opportunities of the future.
He shifted the company from the old dependence on PC software to a cloud-based model that focused on subscriptions and recurring revenue.
And he built a cloud platform that has since become a fierce competitor to the once-dominant Amazon Web Services. Yes, Amazon remains the leader in cloud-hosting, but Microsoft now ranks second and is coming on strong.
Microsoft stock currently has a forward dividend yield of 1.5%. MSFT has an S&P credit rating of AAA and has $47.1 billion net cash on hand. It has a yearly free cash flow of $35 billion and has been doubling its per-share earnings every 4.25 years.
There’s a lot more going on with Microsoft than just its dividend. So, I will be following up with you in the near future on why this stock should at least be on your watch list.
But for right now, I want to note that tech has become a sector where you can have both yield and growth.
Until the economy hit the skids because of the coronavirus panic, all three were great earnings growers.
Translation: When the economy gets moving again, so will these great tech leaders.
And that makes these three relatively safe havens in the current bear market.
Cheers and good investing,
Michael A. Robinson