Wednesday, December 28, 2011

Tech Dividends on the Rise

The technology sector has typically been characterized by rapid product obsolescence and the tremendous amounts of capital necessary to invest in Research and development, in order to maintain the competitive edge. The positive sides of technology include that a simple idea such as a piece of software can be widely distributed for a nominal cost, once the product is finished. The fact that companies have to come up with new innovative products all the time, since the status quo of the existing ones is challenged all the time, has historically lead to volatility in earnings. With such volatility, most companies have had to reinvest most of their earnings back into the business. This has not resulted in future growth however, as some firms ended up betting everything on themselves, while their industry niche was going into extinction.

In addition, the most successfully technology companies have been able to continuously predict and capitalize on future trends. Given the fact that the technologies ten years from now will be different that the technologies from today, a bet on tech stocks seems more like a speculation, rather than an investment. Because of the factors listed above, few tech companies have a wide moat. Most, such as Google, Microsoft, Intel or Apple have a moat, which could last for a few years. But that is until there is some ground breaking technology change or disruption, which provides consumers with a better, slicker and more advanced piece of technology. Companies such as International Business Machines (IBM), which has successfully been able to adapt for decades are the exception, rather than the norm.

Nevertheless, some companies such as International Business Machines (IBM), Intel (INTC) and Microsoft (MSFT) have been able to generate rising earnings per share over the past decade. This has enabled them to initiate a dividend, and also to increase it over time. The following companies have been able to achieve a higher annual dividend for at least five years:

Automatic Data Processing, Inc. (ADP) provides business outsourcing solutions. The company operates in three segments: Employer Services, Professional Employer Organization (PEO) Services, and Dealer Services. This dividend aristocrat has managed to boost distributions for 37 years in a row. Yield: 3.10% (analysis)

International Business Machines Corporation (IBM) provides information technology (IT) products and services worldwide. This dividend achiever has paid distributions for one century, and managed to boost distributions every year for 16 years in a row. Yield: 1.60% (analysis)

Microsoft Corporation (MSFT) develops, licenses, and supports a range of software products and services for various computing devices worldwide. This software giant has managed to raise distributions for seven consecutive year. Yield: 3.10% (analysis)

Intel Corporation (INTC) engages in the design, manufacture, and sale of integrated circuits for computing and communications industries worldwide. The worlds largest chipmaker has managed to boost dividend payouts to shareholders for eight years in a row. Yield: 3.60% (analysis)

AT&T Inc. (T), together with its subsidiaries, provides telecommunication services to consumers, businesses, and other service providers worldwide. This dividend aristocrat has boosted distributions for 27 years in a row. Yield: 5.90% (analysis)

Verizon Communications Inc. (VZ) provides communication services. The company operates through two segments, Domestic Wireless and Wireline. The telecom carrier has managed to boost distributions for seven consecutive years. Yield: 5.20%

Vodafone Group Public Limited Company (VOD) provides mobile telecommunication services worldwide. It offers mobile voice services to approximately 370 million customers; messaging services; mobile data services; fixed broadband services to approximately 6 million customers; and whole sale carrier services to approximately 40 African countries. This international dividend achiever yields 7.70%.
I am not a big fan of technology in general for my dividend portfolio. As a result, I am mostly underweight the sector. While I might miss out on some spectacular stories such as Apple (AAPL), the lack of wide moats make it difficult to commit a large portion of my portfolio to the sector. In addition, the low number of dividend achievers and aristocrats in the technology sector epitomizes the fickle nature of technology as a business in general.

Full Disclosure: Long ADP

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