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When most investors hunt for dividend stocks, the technology sector is often not on their shopping list. The perception is that most technology firms need and are forced to plow every extra cent back into their businesses in order to fuel growth. As a result, tech stocks are seen as a strictly capital appreciation element for a portfolio.
However, this isn't true at all. Tech stocks make for amazing dividend stocks.
The reality is, that many firms in the tech sector are cash flow and profit machines. Thanks to surging revenues and high margins, mature tech firms simply mint money at this point. So much, in fact, that many have too much money sitting on their balance sheets. To rid themselves of that excess cash, many tech stocks have started paying some hefty dividends. And they have been growing those dividends by leaps and bounds too.
In the end, when looking for dividend stocks, the technology sector should be the first stop for portfolios rather than an afterthought. But which tech stocks have what it takes to be considered good dividend stocks as well?
Here are five that are worthy of consideration.
Dividend Yield: 2.45%
No list of dividend stocks in the tech sector can be written without the firm that started the modern trend of payouts from tech. We're talking about Cisco (NASDAQ: CSCO ). CSCO started paying a token dividend back in 2011 and hasn't looked back, growing that payout by more than 480% . And it's easy to see why Cisco has become such a dividend stalwart.
Sensing a slowdown in networking, router and physical equipment sales, CSCO started to pivot into more software and services. Cloud computing, cybersecurity and other such products have quickly become big-time money makers for the firm. Perhaps, more importantly, these sales come with higher margins, reoccurrence and the ability to add value/upsell networking transactions. "We just built you this massive network for your cloud operations. Would you like us to secure it as well?"
Because of this, CSCO has become a cash flow giant. Last quarter alone, the firm managed to see a 16% jump in operating cash flows once adjusting to overseas taxes paid for the Tax Cuts and Jobs Act. Meanwhile, cash on CSCO's balance sheet has swelled to more than $34.6 billion.
With sales of software/services continuing to rise, CSCO should be able to keep bringing in the cash for the long haul. Even better is that the growth in data centers and 5G networking is once again boosting equipment sales.
At the end of the day, Cisco is one of the best dividend stocks to buy - tech sector not.
Seagate Technology (STX)
Dividend Yield: 5.75%
Like previously mentioned Cisco, Seagate Technology (NASDAQ: STX ) may seem like a relic from the dot-com days. However, STX has managed to see plenty of new life in recent years. The key is data center demand is making one heck of a dividend stock.
For many years after the dot-com bust, STX struggled. The rise of mobile and tablet computing crimped PC sales. At the same time, flash-based solid-state drives (SSD) hit Seagate's platter-based hard disk drives (HDDs) right in the wallet. SSDs are faster, smaller, and more power-efficient. Manufacturers liked these facts and started favoring them in PCS and other devices. As a result, STX stocks stagnated and was looking like a lost cause.
That is until cloud computing and data center demand started to take over.
It turns out, those building out networks and data centers prefer capacity over speed. That makes HHDs much better suited for this application. Since Seagate dove into SSD production - like rival Western Digital (NASDAQ: WDC ) - it's been able to reap the full benefits of this expansion. Year to date , STX has managed to produce $1.3 billion in cash flow from operations and $862 million in free cash flows from higher drive demand.
And naturally, Seagate has been rewarding investors with that extra cash. Today, shares yield a tech-sector high 5.75%.
Source: Yuanbin Du Via Flickr
Dividend Yield : 1.58%
225 billion .That's a big number. It also happens to be the amount of cash Apple (NASDAQ: AAPL ) has on its balance sheet. This makes the consumer tech company one of the most cash-rich firms on the planet. That fact alone could make it a big buy. But the fact that Apple has quickly become one of the leading dividend stocks and continues to increase its buyback programs makes it a big buy right now.
The key is that Apple has been able to use its vast cadre of devices to sell apps, music, movies and games. This helps Apple produce plenty of cash flows. Meanwhile, its shift into various services and other add-ons for its customers have only enhanced its cash flows further. So, even though AAPL has been handing out plenty of cash to investors, its over cash balance continues to hover over that $200 billion mark. Last year, Apple spent more than $74 billion on buybacks and raised its dividend by roughly 5.5%.
With new devices hitting the markets and a focus on building out content for those devices, Apple should have no problem growing that cash balance far into the future. That should make dividend investors happy. And while there are some risks with revenue slowdowns and Chinese trade, that massive cash pile provides such a huge cushion to keep the dividend grow going.
With that, Apple is still one of the best dividend stocks around.
Dividend Yield : 1.95%
One of the biggest trends in tech continues to be the growth of cloud computing and mobile access. Any time you use an app to go shopping or check your bank balance, you're tapping into a data center far away. It turns out that's a very good business to be in. Just ask Equinix (NASDAQ: EQIX ).
EQIX is the world's largest owners of these data centers - with more than 200 under its umbrella . The key is that EQIX doesn't actually own or really operate the centers, it's a real estate investment trust (REITs). That is, it owns the specialized buildings and rents space inside to firms to build their required computing needs. It's essentially an apartment building owner for computers.
Given the continued surge in data center demand from e-commerce, cloud computing, and mobile operations, EQIX has been sitting pretty over the last few years. Revenues and funds from operations rose by 14% and 12%, respectively in the first quarter of the year . This continues the REITs string of strong performance. The FFO growth is of particular interest as this cash flow directly translates into how much money a REIT can hand back as dividends to its shareholders.
On that front, EQIX has been a champion as well. The data center giant has paid plenty of special stock dividends to its shareholders and has managed to grow its cash payout by 45% since 2014.
With continued demand for data centers assured, EQIX is the best dividend stock to play tech's backbone. Shares currently yield 1.95%.
First Trust NASDAQ Technology Dividend ETF (TDIV)
Dividend Yield : 2.97%
Considering that this list didn't even touch such amazing tech dividend stocks like Oracle (NASDAQ: ORCL ), Microsoft (NASDAQ: MSFT ) or even Texas Instruments (NYSE: TXN ), one approach could be to think broad. There are plenty of tech ETFs on the market, but only the First Trust NASDAQ Technology Dividend ETF (NYSEArca: TDIV ) tackles the sector with a dividend approach.
The $1 billion fund tracks an index that screens for tech stocks that have paid a regular or common dividend within the past 12 months and haven't cut the payout either. This provides exposure to all the top names in tech that pay dividends - currently at 83 different stocks. This includes all the names on this list as well. That focus also throws off a surprising amount of income as well. Today, TDIV has an SEC 30-day yield of nearly 3%. That's' better than the S&P 500 and current yields on Treasury bonds.
And as a total return component, TDIV has been top notch. Since its inception in 2012, the ETF has roughly doubled in share price and managed to produce an average annual return of around 12%. That's around the same as the S&P 500 . The key is that TDIV has been less volatile than the broader index. Less volatile than all the tech stocks in the broader index as well. The secret is in the power of the dividends.
All in all, for investors looking to score some hefty dividends from tech and take advantage of the sector's growth, TDIV could be the best way to capture those benefits.
Disclosure: At the time of writing, Aaron Levitt did not have a position in any stock mentioned.
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