Well it took til 2012, but Apple is paying a dividend (not quite actually they had paid one previously all the way back in 1995). But in honor of this latest entrant in the dividend paying companies lets look at the possibility of build a dividend index out of canyoubelieveit a set of tech companies. Ten years ago tech companies were mocked as bogus and lumped under the heading of pets,com style flameouts and the *real* companies, Financial services, were all the rage as "adult" investments for the sober investor. What a difference a decade makes.
Who was really the risky bet in 2002? The likes of Apple and Microsoft or the likes of Lehman and company? As we sit here the large tech companies are sitting on pristine balance sheets with tens of billions in cash, and the financials still standing are happy to be, well, still standing, and high fiving that they passed the stress tests after some governmental CPR.
What do companies do when they have a warchest of cash? Well they can reinvest it in the business, but many tech companies operate on a pretty asset light model. The only really large expenses come when they buy other companies and this often works out poorly. The second thing they can do is buy back shares, which may provide a boost to share price. And the third thing they can do is to pay a dividend to shareholders.
It used to be the case that the chances of a tech company paying a dividend were slim and none. Dividend paying companies are a pretty dowdy lot, and so dividend investors needed to look at Utilities and the like as options for income. But as tech companies grew, and the options for how to deploy cash were exhausted paying dividends is now trendy.
The S&P Index yields around 2% and its possible now to pick a basket of tech stocks that pay a better current dividend yield with arguably more attractive growth possibilities.
The yield is in part a function of price. IBM shares have been on a tear and even though the company has raised its dividend from $0.59/share in 2002 to $2.90/share (almost 5x growth over the decade) the yield works out to only 1.5%. Other companies like SAP (0.9%) and Oracle (0.8%) pay only a token yield. Cisco recently joined other big techs and now pays a 1.6% dividend.
So with a goal of beating the S&P's ~2% yield with tech companies here is a basket of four companies to do just that
- Apple 1.8% dividend yield
- Applied Materials, 2.9%
- Intel 3.0%
- Microsoft 2.5%
There are three questions to ask when examining dividends. The first and easiest to answer is current yield. An equally weighted basket in the above companies equates to current yield over 2.5% which beats the S&P by around 25%.
The next question is how safe is the dividend? Each of these four companies has billions of cash on its Balance sheet, AMAT has the least at $6 Billion. Probably enough to weather a storm or two.
At this point you might ask, besides the fact that its a hot topic this week - why include Apple on the list? After all, they pay less than the market average dividend yield. This brings us to the third topic in dividend investing - dividend growth. Remember the IBM example of 5x dividend growth over the past ten years? Who know if Apple can pull this off or not, but if so this would mean a vurry, vurry tasty 9% dividend yield in 10 years. Microsoft began paying a dividend in 2003 when it paid $0.08/share, today its dividend has grown 8x to $0.68/share. Intel paid $0.08/share dividend in 2002, and today doles out $0.78/share, AMAT initiated a $0.06/share dividend in 2005 which its grown to $0.31/share today.
2.5% by itself isn't that much to get excited about, but at the same time its way better than what your cash pays you (nothing). Bonds may have a little better current yield but as Buffett says today "bonds should come with a warning label" meaning they will not fare well in an inflationary environment. Plus bonds can't grow their yield, and certainly not like the level of growth Intel, Microsoft and Applied Material managed.
Without getting into the specific business dynamics, the four companies mentioned all exhibit desirable characteristics for a dividend investor - above average current yield, safety ensured by robust cash flows and strong balance sheets, and with a decent chance to grow their yield over time.
As an historical note, one of the things that has worked best in investing is to find firms with higher than average yields with low payout ratios. Google is the last behemoth tech to not participate in the tech dividend revolution, let's hope they get on board soon.
As always this is not investment advice, just ideas, you need to do your own research. What I find interesting its that its possible to find companies, tech companies, where the stocks offer both higher returns and a safer return than cash and bonds.