July 3rd, 2012
by Guest Author Bill Barnhart, Y-Charts.com
Now that technology giants Apple (AAPL) and Dell (DELL) are climbing on the stock dividend bus, is it time to chase yields in tech stocks? It’s a loaded question. Buying stocks just for above-average dividend yields is always risky business. But reliable streams of dividend payments are no longer a mirage in the traditional dividend dessert of the tech sector.
Among S&P 500 stocks, more than half of tech stocks pay dividends, up from 18% in 2002, according to FactSet Research Systems. A simple YCharts Stock Screener shows why the so-called new-economy (the tech sector) is a better dividend hunting ground than the old-economy (industrials).
Among stocks with market-capitalization large enough to be in the benchmark Standard & Poor’s 500 index but yielding more than the S&P 500, 35 tech stocks with dividend payout ratios greater than zero and less than 1.00 are available at price/earnings ratios of less than the S&P 500 index. Twenty-four industrial stocks pass the screen.
Let’s regurgitate that mouthful. If you want to own an equity investment paying 2% in dividends (compared to 0.75% yield on five-year Treasury notes), you can buy an S&P 500 index fund. But many value investors want yields greater than the S&P 500 benchmark.
The S&P 500 dividend payout ratio – the proportion of net income paid out as cash dividends on common stock – is 29%, a good benchmark for judging any company’s dividend policy. If the payout ratio is greater than 1.00 (greater than net income), the company’s dividend may be in jeopardy.
The price-to-earnings ratio of the S&P 500 is just over 15 (you’re paying $15 for $1 of earnings). A PE ratio less than the S&P 500’s is one potential sign of a stock bargain relative to the benchmark.
So, there are more large-capitalization technology stocks than industrial stocks with above average dividend yields, reasonable dividend payout policies and below-average prices relative to recent earnings. Among the tech stocks in the screen are household names such as Applied Materials (AMAT), Intel (INTC) Microsoft (MSFT), and Corning (GLW). Dividend-paying tech stocks have been busy boosting the payouts in recent quarters.
One way of testing the safety of a dividend is tracking cash from operations, which companies need to pay dividends. This metric is more robust among dividend paying tech giants than comparable old-economy industrials.
For aggressive yield chasers, Lexmark International (LXK) and Seagate Technology (STX), look appealing. But the safety of the two companies’ dividends varies quite a bit, based on Seagate’s superior cash generation. Dividend yield alone is not the answer.
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