We’d split tech stocks into two different categories:
# 1 company with disruptive technology Enter different areas such as retail (Amazon), television (Netflix), finance (Robinhood) or accommodation (Airbnb). These companies are fighting for market share and growing rapidly. They are not interested in paying dividends.
# 2 Companies that once grew rapidly from technology breakthroughs but are now grown. These are “adult” technology stocks that are well established in their respective markets. Since it is in their DNA to develop new technologies, they still manifest multiple growth vectors.
At Dividend Stocks Rock, we’re interested in the latter. Older tech stocks have opened up new markets that are now relatively mature. We can think of Microsoft and Intel that were at the beginning of the PC era. Now that consumers are switching to smartphones and tablets, PC sales are slowing. However, both companies continue to generate strong cash flow from their PC operations. At the same time, they have also developed other technologies (cloud, big data, data center, etc.) with which they can achieve high single-digit to double-digit sales growth.
If you’re looking to find dividend payers among technology stocks, the semiconductor industry is your best bet. Here you can find companies like Broadcom (AVGO), Intel (INTC), Texas Instruments (TXN), Qualcomm (QCOM), Analog Device (ADI) and Taiwan Semiconductor (TSM). They are all “old” technicians who have gone through multiple technology cycles and found ways to get bigger and stronger. Today they all show great prospects. Their expertise, size and reputation are their best assets.
Another industry that is gaining ground in Canada is software or is often referred to as SaaS (Software as a Service). SaaS companies are based on my favorite concept: recurring income. You can find companies like Sylogist (SYZ.V), Absolute Software (ABST.TO), Open Text (OTEX.TO), Enghouse (ENGH) and Tecsys (TCS.TO). These companies will typically use their exceptional cash flow generation skills to acquire smaller businesses and increase their market share. Her return is minimal (along with Sylogist), but her dividend and capital growth are phenomenal.
I discussed my top 3 Canadian SaaS tech stocks in this video below:
It’s usually rare to find tech stocks with high dividend yields. If you’re looking for technology stocks with a 6% return, you won’t find this on our list. We use this sector to increase our portfolio appreciation while achieving a minimum income.
The risk with technology stocks is falling for the proverbial “false hope”. “Hope” that a new technological breakthrough will come and save the business. “Hope” the stock price will skyrocket in the next quarter. “Hope” you find the nearest Microsoft or Apple (AAPL). You are better off keeping the ones that have proven themselves than looking for your next home run. If you keep up with your “strategy of hope” you will create your own tech bubble and will no doubt get burned.
Obviously, the second risk with technology stocks is the speed at which technology evolves over time. You never know whether you have the next BlackBerry (BB) or the next Apple in your portfolio. It is therefore important to select companies that have a well-established growing business model and at the same time to multiply this growth in other ways.
How to make the most of it
It doesn’t seem intuitive to use dividend metrics to pick companies that are anything but high in returns. However, if you use the dividend triangle to determine which technology stocks to buy, you are likely acquiring a company that thrives around it and feels secure enough to reward shareholders at the same time. Dividend growth is rare in this sector, and this is how you can identify a company that won’t blow your face.
The dividend triangle prevents you from buying Facebook, Netflix, Tesla, and the like. However, it also prevents you from using BlackBerry, Nortel, and Yahoo! at their top price.
The tech sector is best for growth investors, but it could also provide a safe haven for high-income investors.
- Market Capitalization: 1.765B
- Yield: 0.95%
Microsoft develops and licenses consumer and business software. It is known for its Windows operating systems and the office productivity suite. The company is divided into three higher-level segments: productivity and business processes (legacy Microsoft Office, cloud-based Office 365, Exchange, SharePoint, Skype, LinkedIn, Dynamics), intelligence cloud (infrastructure and platform-as-a-service offerings Azure, Windows Server Operating System, SQL Server) and more personal computing (Windows Client, Xbox, Bing Search, Display Advertising and Surface Laptops, Tablets and Desktops). Microsoft owns Xamarin, LinkedIn, and GitHub through acquisitions. Sales revenues from products and services as well as other sales revenues are shown in the income statement.
Microsoft is also one of the oldest and newest technology companies. While management benefits from a strong core business model that generates cash flow through a subscription-based model, it has proven its ability to develop other growth vectors. The latest success is called Azure and is number 2 in public cloud services. Azure is on a strong growth path in the coming years. Cloud services will also be part of the future of any serious business. Speaking of which, his close relationship with Corporate America opens the door to additional cross-sell opportunities as the cloud business expands.
Open Text (OTEX.TO) (OTEX)
- Market Capitalization: 16B
- Yield: 1.80%
Imagine a large company that has 100 employees and continues to grow. Tons of information about products, sales, employees, expenses, contracts, etc. are gathered every day. This information accumulates in mountains of illegible reports. A solution is needed to receive, integrate and process this data. This is known as an Enterprise Information Management (EIM) system. EIM helps managers make better decisions by organizing the information for quick access, understanding, and trust. OTEX is an industry leader and Canada’s largest EIM provider. It helps over 100,000 customers share, store, retrieve, and analyze their company’s information.
Big data, cloud, and security are three keywords that you haven’t heard of. As we move forward in an era of consolidation, companies get bigger every second. Managing growth is one thing, but dealing with the massive amount of data that growth brings into any business is part of the Herculean work. Enterprise Information Management (EIM) systems were designed to solve this problem, and OpenText happens to be one of the leaders in this emerging business. OTEX has built up strong expertise in the area of growth through acquisitions. Every time a new company is added, cross-selling opportunities are increased.