The technology sector is filled with high-growth companies vying for market share. Rather than pay dividends, many of these businesses prefer to reinvest excess cash in their operations, a strategy that makes sense given the quickly changing nature of technology.
However, if you’re willing to do a little digging, it’s possible to find tech companies that buck the trend. With that in mind, we asked three Motley Fool contributors to write about tech stocks with strong dividends. Keep reading to see why Texas Instruments (NASDAQ:TXN), Taiwan Semiconductor (NYSE:TSM), and Cisco Systems (NASDAQ:CSCO) made the list.
The analog chipmaker
Trevor Jennewine (Texas Instruments): Texas Instruments is a semiconductor manufacturer that specializes in analog chips and embedded processors. The former convert real-world signals like sound, temperature, and pressure into digital data; and the latter handle specific tasks, such as powering calculators, home appliances, and office machinery.
These chips aren’t as flashy or expensive as high-performance central processing units (CPUs) or graphics processing units (GPUs), but they are just as critical. In fact, analog chips are used in all electronic devices, and embedded processors are used in most. More importantly, Texas Instruments is the industry leader in both markets.
Of course, if you follow the semiconductor space, you’re probably aware of the global chip shortage. Despite these headwinds, Texas Instruments’ business is firing on all cylinders. Revenue growth accelerated to 29% and 41% in Q1 and Q2 2021, respectively, driving strong double-digit earnings growth in both cases. So, what’s the secret behind that performance?
Texas Instruments has a few noteworthy advantages. First, it handles the majority of semiconductor manufacturing, assembly, and testing in house, which translates into fine-tuned control of its supply chain. Second, it uses a 300 millimeter wafer production process, which costs about 40% less than the 200 millimeter process used by most competitors. Finally, the company makes 80,000 different products for over 100,000 customers, meaning its business is highly diversified.
Collectively, those advantages have helped Texas Instruments maintain its industry-leading position. In fact, the company captured roughly 19% of the $55 billion analog chip market last year, more than double the market share of the next closest competitor. And its financial performance has been just as impressive over the long term.
Between 2004 and 2020, free cash flow per share grew at 12% per year, allowing the company to grow its dividend at an annualized rate of 26% for 17 consecutive years.
Currently, the quarterly payout sits at $1.02 per share, or $4.08 on an annualized basis, representing 56% of free cash flow. Put another way, there is plenty of room to grow that dividend in the coming years, not to mention the potential for share price appreciation. That’s why this dividend-paying tech stock looks like a smart investment.
The most important company you’ve never heard of
Jeremy Bowman (Taiwan Semiconductor): When investors think tech stocks, they tend to gravitate to “FAANG” stocks like Apple or high-priced cloud computing stocks, but semiconductor companies deserve your attention as well. The global chip shortage has made it clear how crucial these companies are to the global economy, and none more so than Taiwan Semiconductor, or TSMC.
TSMC is one of the world’s most valuable enterprises, with a market cap of $600 billion, and its list of customers includes tech giants like Apple, Broadcom, and Nvidia, all of whom design chips for its foundries.
Moreover, TSMC has the largest capacity among the world’s semiconductor manufacturers, and it’s a vital supplier of chips for the automotive and smartphone industries. According to reporting from The Wall Street Journal, it makes 92% of the world’s most sophisticated chips, and its size and scale give it manifest competitive advantages in an industry that requires heavy capital expenditures.
Taiwan Semiconductor is also highly profitable, generating a profit margin of 39% last year, or $17.6 billion on revenue of $45.5 billion. Its recent results have been strong as well, with sales jumping 28% to $13.3 billion in the second quarter.
Chinese stocks have taken a hit in recent weeks after a government crackdown on the for-profit education sector, where authorities essentially ordered tutoring companies like New Oriental Education and TAL Education Group to be non-profits. The Chinese government has also slapped tech giants like Alibaba and Didi Global on the wrist with fines and other restrictions.
However, TSMC is unlikely to see such a backlash, since the Chinese government has made hardware technologies like semiconductors a strategic priority. TSMC’s base in Taiwan, a semi-independent republic, also gives it some daylight from the Chinese government, though political tensions have shaken the stock in the past.
For dividend investors, TSMC doesn’t disappoint either, as the company currently pays a dividend yield of 1.5%, and it has the cash and profitability to support further hikes.
Dividends are rare in the tech industry, and even better, TSMC seems to have something for every type of investor: income, growth, and a wide economic moat that gives the company monopoly-like power in a key industry and huge profit margins.
The networking effect
Eric Volkman (Cisco Systems): No matter what trends come and go in the tech sector, the world is going to need networking equipment and software. Supplying much of that will be Cisco, the reigning and longtime king of networking.
While networking isn’t the newest or most attractive tech sector, it is essential. And that keeps tens of billions of dollars flowing into Cisco’s coffers every year. With its size, the company benefits from economies of scale; and as a dominant player in the market, it has pricing power, too.
These traits keep profitability high, with annual net margins typically in the 20%-plus range. While revenue has been rather stagnant over the past few years, the cash keeps flooding in for Cisco — on an annual basis, it hasn’t fallen below $12.4 billion across the past five years, a level that frequently tops the company’s profitability. It’s also more than twice what Cisco requires to pay its regular quarterly dividend.
Ah yes, the dividend. Cisco initiated it in early 2011 (can it really be a full decade?). It has not only paid it without fail in every quarter since then, it has raised it at least once per year. So across the 10 years, a payout that began at $0.06 per share is now more than six times higher at $0.37.
That, combined with Cisco’s status as a respected but generally not beloved tech stock like Apple, makes for a meaty dividend yield. At the moment, that yield is 2.6%, which beats the pants off Apple’s 0.6% and database deity Oracle‘s 1.4%. It also compares favorably to that of celebrated dividend payers in other segments like consumer goods.
Granted, Cisco is considered to be running a more mature business than the still-growing Apple, or any one of a number of other tech dividend payers. But I don’t think anyone should infer from this that the top line will remain still.
Cisco’s secret weapon just might be its security products, the revenue for which rose by 13% year over year in the most recent quarter. That was nearly three times the rate of Cisco’s applications segment, more than double its core infrastructure platforms category, and well above the 8% growth in services.
Of all those businesses, security is by far the smallest in terms of revenue. That, combined with the strong potential it has — particularly in a world losing sleep over hacking attacks — could become a major top-line growth driver in the very near future.
Even if it doesn’t, Cisco is sure to remain a cash-generating machine, and a company that prioritizes its dividend. I feel there’s much for investors to gain by owning this stock and clocking its regular payout.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.