Is tech a long-term must-have for your portfolio? I’d argue it is. Technology is rapidly changing everything around us.
Our modern-day society ceases to work without access to stuff like smartphones and the Internet. But dividend growth investors like us also want safe, growing dividends.
Can we have our cake and eat it, too? Can we get that tech growth and totally passive dividend income? Yes.
Now, the usual suspects are Apple and Microsoft. Two tech stalwarts that I’ve said many times are must-own stocks for dividend growth investors.
I’ve been pounding the table on these stocks for a long time because they’re phenomenal businesses. But they’re not the only long-term tech plays.
Today, I want to tell you about three very different tech stocks for dividend growth investors. Ready? Let’s dig in.
The first tech stock for dividend growth investors is Broadcom (AVGO).
Broadcom is a global semiconductor company with a market cap of $204 billion.
If you want to be in tech, you’ve gotta be in semiconductors. Almost every piece of hardware we interact with these days – from computers to cars – relies on semis. And Broadcom is one of the biggest and best out there when it comes to semis. They’re also one of the biggest and best out there when it comes to paying a safe, growing dividend.
Broadcom has increased its dividend for 11 consecutive years.
11 straight years of higher dividends is a nice start, but maybe you might not find that super impressive. Well, what Broadcom might lack in length, they more than make up for in terms of growth. Their 10-year DGR of 69.1% is the highest 10-year DGR I know of. Plus, the stock yields a market-beating 2.9%. Where else do you get that kind of yield and that kind of growth? And with the dividend only costing about half of free cash flow, this dividend’s trajectory is higher.
This stock is up 42% over the last year, but the business results justify much more.
They just reported Q3 results on September 2nd, showing 16.5% YOY revenue growth and nearly 200% YOY growth in EPS. The reason the dividend and stock have performed so well is because the business has performed so well. Stocks are, after all, slices of real businesses. While this stock is up big over the last year, so is the business. And because of that, most basic valuation metrics aren’t out of line. The yield, for instance, is actually 30 basis points higher than its five-year average. It’s definitely not as cheap as it was when I highlighted it as undervalued last year around $300/share, but the company is also making more money now. This is a winner that’s up 1,500% over the last decade. If you want tech exposure in your dividend growth stock portfolio, don’t leave Broadcom off the list.
Next up? Let’s talk about Cisco Systems (CSCO).
Cisco is a multinational technology conglomerate with a market cap of $250 billion.
Whereas Broadcom attacks tech from the semi angle, Cisco gets after tech primarily via networking hardware and software. With the Internet of Things becoming a near-term reality, the interaction between networks is going to be critical. Cisco has this reputation as a sleepy giant that doesn’t do much as a stock. Well, Microsoft had that same reputation in the mid-2000s. And look what happened there. Plus, it’s not like Cisco is a dog. This stock is up almost 300% over the last decade. More importantly, though, they pay a safe, growing dividend on top of that tech exposure.
Just like Broadcom, Cisco has also increased its dividend for 11 consecutive years.
Now, Cisco hasn’t been a barnburner in the way that Broadcom has been. Its five-year DGR is a more pedestrian 11.8%. Still, that’s double-digit dividend growth, which is paired with the current yield of 2.5%. Against almost anything that isn’t Broadcom, those are great numbers. Plus, the dividend is even more secure in this case, accounting for a bit over 40% of FCF.
This stock is up nearly 50% over the last year, but it’s not unreasonably valued.
That said, the stock also doesn’t look explicitly cheap. Most basic valuation metrics are elevated a bit off of their respective recent historical averages. The P/CF ratio of 16.3, for instance, is higher than its five-year average of 13.7. But there’s also been some recent growth acceleration across parts of the business. And their margins have expanded nicely over the last few years. In my view, it deserves a higher multiple than it used to get. The market might finally be waking up to this one. If you’re still sleeping on it, consider changing that.
My third tech stock for dividend growth investors is Digital Realty Trust (DLR).
Digital Realty Trust is a worldwide data center REIT with a market cap of $47 billion.
This real estate investment trust’s exposure to data centers is exciting. Big Data is practically the 21st century digital equivalent of Big Oil, except data isn’t slowly running out. You’ve got semis with Broadcom, networking hardware and software with Cisco, and now data center real estate with Digital Realty Trust. Really hitting a lot of angles with these three very different businesses. That diversification across tech can give you exposure to many different facets of the future. And it can create a more robust and safe dividend profile. Speaking of which, this company has delivered the dividend goods.
This company has increased its dividend for 17 consecutive years.
So this company gives you the longest dividend growth track record out of these three names. And with a 10-year DGR of 8.6%, it’s no slouch in terms of giving shareholders generous dividend raises. The stock also yields a market-beating 2.8%. This is another safe dividend, with the current payout only taking up 71.7% of the midpoint for this fiscal year’s core FFO/share guidance. That’s not a particularly high payout ratio for a REIT.
The stock is up 24% YTD, but this is another company that continues to grow like clockwork.
When a business grows like clockwork, it shouldn’t be surprising to see its stock go up like clockwork. Digital Realty Trust reported Q2 results showing 9.8% YOY revenue growth and 19.5% YOY growth in FFO/share. And with the way Big Data is exploding, the demand for data centers is rising exponentially. Now, this is the one stock on the list where I’d really like to see a pullback. The P/CF ratio of 25.4 is hefty. That’s a good deal higher than its five-year average of 19.4. But if a pullback does come, don’t forget about this company. The business, dividend, and stock are all likely headed a lot higher over the long run.
— Jason Fieber
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