JHere are many exciting tech stocks that offer investors the chance to take advantage of explosive growth opportunities. But the world of technology is changing rapidly and the competition is intense. One way to make sure you’re investing in a business that’s built to last is to look for ones that pay regular dividends.
The dividend is a sign of financial strength. Usually, companies that pay regular dividends have consistently reported profits for years. It is also a reflection of management’s confidence in the future.
To give you some ideas, let’s take a look at two of my favorite dividend-paying tech stocks right now: TE connectivity (NYSE: TEL) and Apple (NASDAQ:AAPL).
1. TE Connectivity
TE Connectivity provides all the boring bits that power data centers, electric vehicles and communications equipment. We are talking about connectors, sensors, transformers, sockets and plugs, cables and other components that the company sells in various markets. In 2021, transport equipment represented 60% of turnover, industrial products 26% and communication supplies 14% of activity. Lately, fast-growing markets like 5G, connected homes, and cloud computing have created new opportunities for the company.
The stock is down 25% from its recent high, but that doesn’t reflect the company’s performance. Sales were up 8% year over year last quarter, with adjusted earnings per share up 20%.
The only negative was the transportation business, where sales were down 15% from the prior year quarter. This was due to weak auto production, but management characterized demand as healthy across each segment.
In the long term, management is optimistic about opportunities to offer products for electric vehicles, factory automation and cloud applications. In other words, the future of TE Connectivity is secure. As various industries become more digitized, a company’s relationships with its customers can help it identify certain technology trends that it can capitalize on.
What emerges from this activity is a 10-year record of progressive improvement in operating margin and free cash flow, hallmarks of a resilient business. It paid out 35% of its free cash flow last year as dividends. This brings the current dividend yield to 1.62%, which is not high, but it is above the S&P500 average of 1.33%.
With a forward price-to-earnings ratio of 17, this tech stock offers good value relative to the market average, where the S&P index is trading at a forward multiple of 19.4. This is an under-the-radar tech title that offers a long-term benefit while paying you income along the way.
Apple has an enviable brand, selling a product that its customers keep with them throughout the day. There are plenty of big mainstream brands that would love to say that. “People expect Apple to solve tough problems with easy-to-use products,” CEO Tim Cook said on the fiscal first quarter earnings call. “And the iPhone has never been so popular.”
Indeed, Apple is rolling right now, as consumers switch to 5G. Revenue hit a record $123.9 billion in the December quarter. With the recent launch of the new budget iPhone SE in March, revenues are expected to remain strong in the near term. The stock has returned 28% over the past year, as many tech stocks have underperformed.
Apple’s dividend yield is below average, currently standing at just 0.52%. But investors should appreciate it just as much as TE Connectivity’s. Over the past five years, Apple has increased the dividend by 48% compared to 31% for TE Connectivity.
The reason why Apple’s performance is weak is mainly because the company only paid out 14% of its free cash flow last year. But the low payout also means he has enough headroom to increase the dividend. Additionally, the company is sitting on a mountain of cash to fund more returns on capital for shareholders. It had $85 billion of net cash on the balance sheet at the end of December.
It is very likely that Apple will at least double its quarterly dividend payment over the next 10 years. So investors who buy today could earn a dividend yield of around 1% on their original cost by 2032. That’s the fun of owning dividend growth stocks.
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John Ballard has no position in the stocks mentioned. The Motley Fool owns and recommends Apple. The Motley Fool recommends the following options: long calls $120 in March 2023 on Apple and short calls $130 in March 2023 on Apple. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.