There are many places a dividend investor can look to find their next high-quality dividend stock. While many investors tend to focus on those stocks with the longest dividend increase streaks, there are high-quality tech stocks that are emerging in terms of their own dividend increase streaks.
Many tech stocks have been added to the Dividend Challengers list, which is a group of companies that have at least five years of consecutive dividend increases.
Interestingly, fast-growing technology stocks once thought of simply as ways to invest in growth have begun to mature. Let’s take a look at three attractive Dividend Challengers in the tech space today:
- Texas Instruments (NASDAQ:TXN)
- Cisco Systems (NASDAQ:CSCO)
- Broadcom (NASDAQ:AVGO)
Dividend Growth Tech Stocks No. 1: Texas Instruments (TXN)
Semiconductor designer and manufacturer Texas Instruments is one of the oldest tech companies still around today. It has significant leverage to economic strength given its semiconductors have a wide variety of uses, but in recent years, the company has also become a serious dividend payer.
Indeed, Texas Instruments is currently on a 17-year dividend increase streak, having boosted its payout by a compound annual growth rate (CAGR) of 38%. In the past five years alone, Texas Instruments has boosted its payout with a 22%CAGR, so it has become not only a terrific dividend growth stock, but it pays a strong yield as well.
With its most recent dividend increase, Texas Instruments has a yield of 2.3%, which is ~80 basis points higher than the S&P 500. Thus, investors get a virtuous combination of current yield and rising payouts in addition to a nearly two-decade streak of rising dividends, all from a company we project will grow earnings at ~8% annually in the coming years.
Texas Instruments will likely need to slow down its pace of dividend increases in the coming years given its payout ratio for 2020 is estimated to be about 75%.
We believe the company will continue to raise its dividend for the foreseeable future, but with the immense pace of growth in the dividend in recent years, it isn’t reasonable to expect that to continue. Therefore, while the rate of growth will almost certainly slow down, we see many more years of dividend increases ahead for Texas Instruments.
Cisco Systems (CSCO)
Cisco Systems is one of the more tenured tech giants available for investors today. The company is the undisputed leader in computer networking hardware, as well as more recent moves into cloud, data center, and security products, among others.
The company went public thirty years ago at a split-adjusted price of just six cents, and has thus produced investor returns of more than 75,000% over that time frame. However, Cisco is more than one of the tech stocks to buy for capital appreciation, as it began paying serious dividends several years ago.
Cisco began paying dividends a decade ago and has raised its payout quite strongly since then, having produced a CAGR of 20%. The dividend has reached $1.44 per share after being initiated at an annualized rate of $0.24 per share. That has also afforded Cisco a very strong current yield, as the share price hasn’t kept pace with the sizable dividend increases sustained over time.
The current yield is quite strong at 3.2%, which is more than double the S&P 500. Thus, Cisco is not only a very strong dividend growth stock, but it is a pure income stock as well, doubling the broad market yield.
In addition to these highly favorable characteristics, Cisco’s payout ratio is still very low at less than 50% on 2020 earnings. We also see the payout ratio remaining below 50% for the foreseeable future despite robust forecast dividend increases on the horizon.
Cisco, then, has an outstanding combination of dividend growth, current yield, dividend safety, and the ability for the dividend to continue to be raised for many years to come, even if earnings take a dip in the future.
Broadcom is a semiconductor company with a wide array of applications, such as infrastructure, wireless communications, storage, automation, and more. Like TXN, AVGO is one of the dividend-paying tech stocks to keep your eye on.
Unlike Texas Instruments, however, Broadcom is fabless, which simply means it does not produce its own chips.
Broadcom designs and markets its chips, but production is handled by third parties. This provides Broadcom with strong free cash flow and low capital expenditure needs, meaning it is free to return a lot of capital to shareholders. Having raised its payout each year for the last decade, it certainly has delivered.
The first dividend payment made in 2010 was just seven cents per share on a quarterly basis, and the most recent quarterly payment declared was $3.60 per share, which equates to a CAGR of 48%, staggering growth in the dividend by any measure.
We do not think Broadcom is done raising the payout by any means, however, as we see 8% annual growth over the next five years, even from this very high level.
Part of the reason why we have a positive outlook on this dividend stock is that Broadcom’s payout ratio is just over 50% after the most recent dividend increase, and Broadcom continues to grow earnings at high single-digit rates. That should leave plenty of room for additional increases, as well as a high level of dividend safety.
Finally, Broadcom’s current yield is also very appealing at 3.1%, more than double the S&P 500, similar to Cisco. Broadcom, then, is truly a dividend growth and income stock today.