Technology is a perennially hot space for investors looking for momentum or growth ideas, but it can also be a fertile area for investors who like to couple earnings growth with dividends. Although the range of "dividend growth" options in the tech sector is still limited when compared to more traditional sectors like consumer staples, dividend investors have a few valid options when it comes to diversifying toward the tech sector. (For background reading, see Why Dividend Matter.)
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Dividend-Paying Chip Makers
It may seem odd that an industry known most for its cyclicality, high capital needs and threat of obsolescence, but many of the better dividend-growth ideas in technology are found among the semiconductor companies.
Analog stalwarts Analog Devices (NYSE:ADI) and Linear Technologies (Nasdaq:LLTC) both offer double-digit returns on invested capital, ongoing growth prospects and yields above 2%. Investors can also collect a healthy dividend from Taiwan Semiconductor (NYSE:TSM) - the world's largest fabricator of semiconductors - and a likely beneficiary of what will almost certainly be an ongoing trend of companies focusing on design and marketing and outsourcing manufacturing to the fabricators. (For related reading, see Top Dividend Plays For 2011.)
Intel (Nasdaq:INTC) also stands out with a current yield of about 3.4%. Many investors have written off Intel due to the migration of consumers toward smartphones and tablets, but that may be hasty. Intel absolutely has some catching up to do, but if these devices are here to stay, Intel's enormous R&D budget could very well buy it back into the race.
Software - One Big, One Small
Many investors may not have even heard of Blackbaud (Nasdaq:BLKB), a company that provides software to non-profit organizations. The company does pay a nearly 2% dividend, though, and analysts presently believe that the company can continue to post double-digit earnings growth for several years to come.
Exciting growth seems like a distant memory for Microsoft (Nasdaq:MSFT), but this software giant is still growing faster than the overall economy and paying a decent dividend to boot. Like Intel, Microsoft needs to reassure investors that it can change and adapt with the times, but it seems that Microsoft could, at a minimum, harvest compelling amounts of cash flow from its business for some time to come. (For more, see The Power Of Dividend Growth.)
Odds and Ends That Pay Healthy Dividends
Like semiconductors, investors may find it surprising that semiconductor equipment makers like Applied Materials (Nasdaq:AMAT) and KLA-Tencor (Nasdaq:KLAC) pay any meaningful dividends at all. Although neither pays out enough to really jump out as an income all-star, both companies' market positions suggest that they can not only continue to grow but also increase their payout ratios over time.
With the success of smartphones from Apple (Nasdaq:AAPL) and Motorola (NYSE:MSI), Nokia (NYSE:NOK) has faded into the background. While the days of Nokia as a popular tech stock seem impossibly long ago now, the fact remains that Nokia is still the world's largest cell phone maker. Nokia is not a safe stock and investors should not assume that dividend is carved in stone. Still, for investors willing to bet on a successful turnaround (or at least a stabilization of the business), this could be a worthwhile idea.
The Bottom Line
It is admittedly difficult to find tech stocks that pay out enough of their earnings and trade at a reasonable enough valuation to offer yields that would interest dividend-growth investors. In many cases, even the most successful tech companies prefer to spend their cash on M&A or share buybacks rather than tie themselves down to the responsibilities and obligations of meaningful, regular dividends. That said, investors willing to take on a little risk and do a little digging can find at least a few ideas here that could help diversify their portfolios and strike a good balance between income and growth. (For more, see Dividend Facts You May Not Know.)
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