Dividend Edition: Best Tech Stocks for Income

The tech industry isn’t usually the first place investors look when seeking income-generating investments. But as the industry grows up, a growing number of tech companies are finding themselves with cash to spare—and choosing to distribute it to their shareholders. Apple (AAPL) is, of course, the latest and most famous high tech company to institute a dividend plan.

Today, I thought I’d introduce some of the other tech industry stocks that are suitable for income-focused investors.

Several of these names have been bogged down in recent weeks by the market’s correction. But if you’re a patient, long-term investor, you know buying a blue-chip, dividend-paying tech company when it’s “on sale” is a good way to lock in a higher yield for yourself down the road.

Intel (INTC) has one of the longest dividend histories in the tech industry. The company has been paying dividends since 1992, and just raised its quarterly dividend to 22.5 cents, for a current yield of about 3.2%. INTC ranks second on Hulbert Financial Digest’s list of “most popular stocks” owned by the newsletters it tracks, with 19 newsletters currently recommending the stock. (Apple is number one.)

In January, INTC was chosen as a Dividend Digest Top Pick for 2012 by Sean Christian, editor of The Personal Capitalist. Christian wrote, “Intel is the world’s largest manufacturer of microprocessors, the central processing units of PCs, and also produces other semiconductor products. The stock has a great yield of over 3%. Intel should generate $11 billion in free cash flow in 2012, which could create dividend increases or M&A activity. We expect a huge demand for transistors, which should translate into great prospects for the company. … Selling at a little over nine times, this stock has healthy potential.”

He has already been proven right about the dividend increase, and the April-May correction has brought INTC’s price back near (though still a bit above) the level where Christian recommended it, creating a nice opportunity for investors who don’t own INTC yet.

More recently, Ian Wyatt recommended Intel in his $100k Portfolio. In the May 14 issue, under the headline “Tech Stocks Today are the Railroad and Steel of Yesterday,” he wrote of Intel, “Sales rebounded dramatically in 2010 and continued to grow to a record $53.9 billion through 2011. Margins also expanded and the company logged record operating income last year. The stock also pays a $0.84 per share dividend for a 3% yield.”

Qualcomm (QCOM), the mobile chip giant, has been paying dividends since 2003. The dividend was just increased to 25 cents per quarter, giving QCOM a current yield of about 1.7%. QCOM regularly pops up in both income-focused and growth-focused newsletters. Recently, DRIP Investor’s Charles B. Carlson recommended it as a bargain on weakness. In the May issue of DRIP Investor, he wrote about QCOM:

“Profits have been moving sharply higher. That includes the March quarter in which the firm posted a 28% sales increase and a 21% jump in net income. Results handily beat Wall Street estimates. Yet, the stock sold off sharply on the news, as Wall Street was underwhelmed with the firm’s guidance for the June quarter. I think the selloff was an overreaction and view the pullback as an excellent opportunity to jump on these shares.”

QCOM is also rated buy by Personal Finance, which suggests trying to snag shares under $70, and Canaccord Genuity analyst T. Michael Walkley, who puts a target of $80 on the shares and writes, “Qualcomm should post strong earnings growth during F2012 and F2013 due to stable royalty rates, strong connected tablet and smartphone sales, increasing market share for integrated chipsets, and strong 3G smartphone sales in emerging markets.”

Microsoft (MSFT) has also paid a dividend since 2003. At 20 cents a quarter, it has a current yield of about 2.7%. And MSFT is also on Hulbert’s popular stock list, at number four.

MSFT is rated buy in Patrick McKeough’s Wall Street Stock Forecaster’s and is rated buy under 32.87 by Roy Ward, editor of Cabot Benjamin Graham Value Letter.

In March, Ingrid Hendershot, editor of Hendershot Investments, wrote about the stock: “Microsoft continues to boot up robust free cash flows, which increased 19% for the first half of the year to $13.4 billion. The company returned $6 billion of the cash to shareholders through dividends and share repurchases and ended the quarter with $52 billion in cash. … Buy.”

Finally, a less-well-known dividend-paying tech company was recommended in the latest Dividend Digest by Richard J. Moroney, editor of Dow Theory Forecasts. CA Technologies (CA) currently pays a 25-cent quarterly dividend, for a yield of about 3.9%. Here’s Moroney’s recommendation:

“Corporate profit margins have been expanding since the recession. CA Technologies (CA) is contributing to that trend. The company used to be called CA, and before that Computer Associates. But despite the three names since 2006, there is no confusion about why customers call on the company: Its software boosts efficiency and trims costs.

“A broad base of customers — banks, manufacturers, retailers, and government agencies — use CA’s security, storage, and automation software. CA also helps clients with cloud computing, which allows them to access a shared pool of computing resources, a concept akin to the way homes tap utilities for electricity.

CA has fattened its own operating profit margins in each of the last four quarters. With a 3.7% dividend yield and robust growth outlook, CA is a Buy and a Long-Term Buy. …

“CA holds $1.03 billion, or $2.13 per share, in cash net of debt. Management plans to return 40% to 50% of free cash flow ($1.18 billion in the last 12 months) to shareholders through dividends and buybacks. In January, the company hiked its quarterly dividend to $0.25 per share from $0.05 per share. Buybacks have lowered the share count by 4% over the last year and 10% over the last three years. Management also approved a new $1.5 billion share-repurchase program, enough to buy back roughly 4% of remaining shares, with $500 million to be spent in the March quarter alone. CA also expects to spend $300 million to $500 million on acquisitions annually through the fiscal year ending March 2014.”

Wishing you success in your investing and beyond,

Chloe Lutts

Editor of Investment of the Week

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