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For the Highest Dividend Growth, Look to the Technology Sector

The technology sector as a whole has seen a dramatic transformation over the past 10-15 years. During the height of the 1999 tech bubble, the technology sector was unanimously viewed as growth stocks. Companies resisted the idea of paying dividends, preferring instead to reinvest all cash flow back into their underlying businesses. As a result, it was nearly impossible to find a technology stock that paid a dividend. However, that shortly changed. Once the tech bubble burst, tech stocks crumbled, and wiped out hundreds of billions in shareholder value.

As the years went on, the technology industry recovered. Companies became larger and more profitable and began generating significant free cash flow each year. This soon got the attention of shareholders, many of whom began insisting on dividend payouts. In response, management teams have widely embraced the merits of paying dividends to shareholders. Nowadays, many of the market’s top dividend growth stocks are in the technology sector.

Technology Leads All Others in Dividend Growth

According to research from First Trust, the technology sector has collectively grown dividend payouts by 24% compounded annually over the period December 31, 2009 through December 31, 2014. This was, by far, the highest growth rate of any sector in the equity market. The next highest growth sector was the financial sector, which grew dividends by 17% per year in that same time. The lowest growth sector was telecommunications, which raised dividends by just 3% per year.

Sectors showing growth rate in dividend

Chart courtesy of FTPortfolios.

Here are five of the technology stocks driving dividend growth in the sector.

Apple, Inc. {% dividend AAPL %}

Apple resumed its dividend program in 2012, after a more than decade-long suspension of its prior dividend program. The stock yields 1.75%. Since it reinstituted its dividend, Apple has grown it by 11% per year. Apple can afford such strong dividend growth because of its rapid growth in earnings and free cash flow.

Apple’s devices, including its flagship cell phones and tablets, continue to sell very well. This is particularly true in emerging markets like China which have only recently opened up to Apple in the past few years. Apple generated $70 billion of free cash flow in fiscal 2015, up 40% year-over-year. This was due to strong sales of the iPhone, which is Apple’s most important product—it rose 36% for the year. In addition, Apple has an enormous amount of cash on the balance sheet. It holds $205 billion in cash, short-term marketable securities, and long-term marketable securities. Such a large amount of cash should allow Apple to continue growing its dividend.

Microsoft {% dividend MSFT %}

Microsoft yields 2.6% and has proven to be an excellent dividend growth stock for many years. It increased the dividend by 16% this year. Over the past five years, Microsoft has raised its dividend by 17% compounded annually. It can grow its dividend at such high rates because it generates a great deal of free cash flow, and carries an extremely strong balance sheet. In fact, Microsoft is one of the three U.S. companies to hold the ‘AAA’ credit rating from Standard & Poor’s. The company holds $99 billion in cash and short-term investments with just $27 billion of long-term debt. Microsoft generated $23 billion of free cash flow last year. Its dividend represented just 43% of its free cash flow.

Cisco {% dividend CSCO %}

Like Apple, Cisco is a relatively new dividend payer. It only began paying dividends in 2011. However, it has massively grown its payout in the year since. Cisco’s first dividend was just $0.06 per share; it has since been raised to its current level of $0.21 per share. Cisco has more than tripled its dividend since 2011.

Cisco has the ability to sustain its rapid dividend growth because of its balance sheet, which holds $59 billion in cash and cash equivalents. Even at its current level, Cisco’s dividend payout ratio is just 44% of its trailing-12 month earnings per share. And, Cisco stock is a relatively high yielder in the technology sector, with a 3% yield.

Qualcomm {% dividend QCOM %}

Qualcomm is one of the highest yielding stocks in the technology sector, with a 3.8% dividend yield. Qualcomm generated $4.5 billion of free cash flow last year. That represents a 17% free cash flow margin as a percentage of revenue—and the company holds $30.9 billion of cash and marketable securities on the balance sheet with only $9.9 billion of long-term debt. Its long-term debt to equity ratio is a very healthy 31%. With its impressive cash flow and clean balance sheet, Qualcomm can continue to grow its dividend at high rates.

Intel {% dividend INTC %}

Intel is also a high-yielder in the technology sector, with a 2.8% yield. Intel’s dividend growth has slowed in recent years. After keeping its dividend flat from August 2012 through November 2014, it increased its dividend by just 6% last year and 8% this year.

Intel is having trouble growing its dividend at high rates because its revenue and earnings growth has slowed. Intel still depends highly on the personal computer, which represents more than half its revenue. The PC is in decline, which means investors should expect single-digit dividend growth going forward. But, it compensates investors for this with a high current yield.

The Bottom Line

Technology stocks can grow dividends at such a high rate, first because their dividends are growing off of low beginning levels. Many technology stocks have only been paying dividends for a short time and are low-yield dividend stocks. The other reason is that technology stocks generate significant cash flow, thanks to modest capital spending requirements and manageable levels of debt carried on the balance sheet.

Image courtesy of First Trust