Tech Stocks vs. Industrials: Big Surprise on Dividend Yield, Payout Coverage, PE Ratio
Now that technology giants Apple (AAPL) and Dell (DELL) are climbing on the stock dividend bus, is it time to chase yields in tech stocks? It’s a loaded question. Buying stocks just for above-average dividend yields is always risky business. But reliable streams of dividend payments are no longer a mirage in the traditional dividend dessert of the tech sector.
Among S&P 500 stocks, more than half of tech stocks pay dividends, up from 18% in 2002, according to FactSet Research Systems. A simple YCharts Stock Screener shows why the so-called new-economy (the tech sector) is a better dividend hunting ground than the old-economy (industrials).
Among stocks with market-capitalization large enough to be in the benchmark Standard & Poor’s 500 index but yielding more than the S&P 500, 35 tech stocks with dividend payout ratios greater than zero and less than 1.00 are available at price/earnings ratios of less than the S&P 500 index. Twenty-four industrial stocks pass the screen.
Let’s regurgitate that mouthful. If you want to own an equity investment paying 2% in dividends (compared to 0.75% yield on five-year Treasury notes), you can buy an S&P 500 index fund. But many value investors want yields greater than the S&P 500 benchmark.
The S&P 500 dividend payout ratio – the proportion of net income paid out as cash dividends on common stock – is 29%, a good benchmark for judging any company’s dividend policy. If the payout ratio is greater than 1.00 (greater than net income), the company’s dividend may be in jeopardy.
The price-to-earnings ratio of the S&P 500 is just over 15 (you’re paying $15 for $1 of earnings). A PE ratio less than the S&P 500’s is one potential sign of a stock bargain relative to the benchmark.
So, there are more large-capitalization technology stocks than industrial stocks with above average dividend yields, reasonable dividend payout policies and below-average prices relative to recent earnings. Among the tech stocks in the screen are household names such as Applied Materials (AMAT), Intel (INTC) Microsoft (MSFT), and Corning (GLW). Dividend-paying tech stocks have been busy boosting the payouts in recent quarters.
One way of testing the safety of a dividend is tracking cash from operations, which companies need to pay dividends. This metric is more robust among dividend paying tech giants than comparable old-economy industrials.
For aggressive yield chasers, Lexmark International (LXK) and Seagate Technology (STX), look appealing. But the safety of the two companies’ dividends varies quite a bit, based on Seagate’s superior cash generation. Dividend yield alone is not the answer.