Watch Your Income Rise Thanks to Silicon Valley’s Latest “Innovation”

INVESTOR’S REPORT

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Dear Reader,

When I talk to tech investors – whether they’re new to the game or Silicon Valley veterans – they say they’re searching growth, growth, growth… and the hefty share-price increases that come along with that.

And that’s been true for decades.

Over the past few years, a new word has entered into their vocabularies – income.

That’s not too surprising, because savvy investors have long sought out dividend-paying stocks not only for the income but also for their superior returns.

What is surprising is that these tech investors are finding those dividend payers in Silicon Valley.

The technology sector arrived relatively late to the “dividend game.” But now, thanks to all the cash the top tech companies have built up since the end of the financial crisis – and pressure from activist investors to spend it – Silicon Valley is in the game.

Big time.

In fact, many top tech companies are well on their way to becoming dividend royalty – stocks that increase their dividend annually for many years in a row.

And that’s good news for investors like you. Here’s why…

1. Prime dividend-paying stocks hold up better during times of low growth or stock-market volatility – and that cash provides a cushion when stock markets are falling.

2. Because the U.S. Federal Reserve has kept interest rates near zero since 2008, investors are scrambling for high-yield investments.

3. However, with bond prices near all-time highs, those yields are down, and dividend-paying tech stocks are outpacing the overall stock market.

4. That’s because tech stocks in general outpace the market. The Nasdaq Composite Index is up 111% over the past few years – compared to 84.5% growth in the S&P 500 and 63% growth in the Dow Jones Industrial Average. So with Silicon Valley’s best dividend payers you’re getting significant share-price appreciation along with your cash.

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Now, let’s take a deeper dive and take a look at five tech firms with a solid track record of dividend growth (and a “bonus” play that also gets you in on the Silicon Valley “income” trend). Only the healthiest, most stable companies can raise their payouts over many years.

So these are some stocks that you want to meet…

There’s More to Tech Than Growth

But before we get there, let’s start by clearing up a misconception that many investors have about tech stocks. They often think that revenue growth and share-price appreciation are the only factors to consider.

As important as growth is, if you ignore dividends and the cash they create, you’re missing a big part of what’s happening with tech today. See, because they are awash in cash, many firms are now linking their growth to shareholder payouts.

That means your investment portfolio is rising in two ways… because growth and income are linked.

3%

2%

1%

0%

The five Tech Dividend Growers have mostly rallied in 2016 and outperformed the market as a whole in large part because investors are favoring dividend-paying stocks.

S I L I C O N V A L L E Y J O I N S T H E D I V I D E N D G A M E

20%

10%

0%

-10%

-20%

Sources: Strategic Tech Investor staff research

12.3%

10.5%

4.4%

Johnson& Johnson

1/2016 5/2016 9/2016 Apple S&P 500

Dividend YieldsPerformance

AAPLS&P 500JNJ

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Many tech leaders have high profit margins and are now swimming in cash, making the sector a great place for dividend growth. In the year between June 2015 and June 2016, just the tech firms in the S&P 500 paid out $59 billion in dividends.

What’s more, tech firms in the S&P 500 held $504 billion in cash at the end of 2015, or 30% of the $1.7 trillion held by U.S. firms. That gives the sector plenty of cash to keep boosting dividends.

Even for younger investors, it pays to add Silicon Valley’s budding Dividend Aristocrats to your core long-term holdings, because the compounding over time can be huge. Dividends that are growing by 7% a year will double in a decade.

To get started, take a look at these five tech firms with a history of strong – and sometimes spectacular – dividend growth.

Tech Dividend Grower No. 1: 3M

You know its adhesive tape and Post-it notes. But 3M Co. (NYSE: MMM) also has significant roles in healthcare, energy, manufacturing, climate control, and electronics.

It is a quiet tech giant – but it has significant reach and depth around the globe.

In the current slow-growth economy, 3M is a great choice, because it isn’t about just one product. It has products for a variety of needs. That could be why 3M stock is up 12.3% year to date.

There may be vagaries in revenue due to the strength of the U.S. dollar, but 3M has been down this road many times before – and it knows how to succeed, regardless of market conditions.

Its five-year average dividend growth rate is a whopping 20.2% – or more than six times that of U.S. GDP growth over the last few years. And it ranks as a Dividend Aristocrat, a firm that has boosted payouts for at least 25 years.

It has raised its dividend every quarter since Dwight D. Eisenhower was president back in the early 1950s.

3M’s dividend payout ratio for the quarter ended in June was 0.53 – and its yield is now 2.57%.

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Tech Dividend Grower No. 2: Honeywell

Honeywell International Inc. (NSYE: HON) is one of those firms that’s been at tech’s cutting edge for so long that you sometimes forget about it.

It’s been on the scene, in fact, since 1885, when it invented the forerunner of today’s thermostat. Then it invented hot-water heaters around the turn of the 20th century.

Even better, Honeywell partnered with Raytheon Co. (NYSE: RTN) to develop computers… in 1955. It also was crucial in NASA programs in the 1960s and ’70s.

This growth-minded company continues to build on its past. It now sees itself as a “cyber industrial company,” meaning it blends software with physical products for the Internet of Everything. More than half its 22,000 engineers are working on software.

And its dividend growth rate also looks great. Over the past year, it’s been a whopping 15%. For the past three years, dividend growth has averaged 12%. Honeywell’s dividend payout ratio for the quarter ended in June was 0.36 – and its yield is now 2.26%.

Tech Dividend Grower No. 3: Johnson & Johnson

Few healthcare companies are as diversified and established as Johnson & Johnson (NYSE: JNJ). And few can match its dividend growth.

The firm has raised its dividend every quarter since 1963. That’s 212 straight quarters. And it’s not just bumping the dividend up by a tiny bit every time. Its five-year average dividend growth stands at a 7%.

And much of its long-term success can be attributed its smart diversification. Of course, it’s famous for such consumer brands as Tylenol, Band Aid, Listerine, Neutrogena, and Benadryl.

Here’s the thing tech investors need to keep in mind. The consumer division made up just 20% of sales last year. Drugs accounted for 45% of revenue, and medical devices made up the other 35%.

Johnson & Johnson also boasts a great pipeline of drugs. For instance, its new autoimmune drug, Remicade, made up 20% of pharma revenues last year. This is a strong competitor with Humira, the best-selling prescription medicine on the planet.

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The stock is up 14.3% for the year, and when you tack on a 2.65% dividend, it remains in pretty elite company.

Tech Dividend Grower No. 4: Verizon

Verizon Communications Inc. (NSYE: VZ) is the former Bell Atlantic of the old Ma Bell telecommunications system – and it’s been making payouts since long before smartphones and the wireless web.

Today, it’s a bona fide tech leader and ranks as the nation’s leading mobile carrier. The firm also is at the cutting edge of installing fiber-optic cable for the superfast broadband connections needed for ultra-high-definition TV streaming.

Now, it’s looking to consolidate its power and begin offering content – web and television – as well as services. In 2015, Verizon bought internet pioneer AOL – and it picked up the web assets of Yahoo Inc. (NASDAQ: YHOO) for $4.83 billion earlier this year.

That will give Verizon a strong presence on the web and a lot of content outlets for growth.

In the past 12 months, Verizon’s dividend growth rate was a solid 2.7%, and it’s had similar growth for the three- and five-year periods. Year to date, the stock is up nearly 8%, and it’s throwing off a hefty 4.5% dividend yield.

Tech Dividend Grower No. 5: Apple

You can’t put together a list of great dividend-paying tech companies without including the biggest market-cap stock of all time.

Yes, Apple Inc. (NASDAQ: AAPL) has come under pressure this year on concerns about slowing growth in China’s smartphone market. But Apple remains a cash machine with $231.5 billion on hand and a steady 2% dividend.

One crucial piece of information that was overlooked in the stock’s selloff was the massive conversion rate of Chinese Android users to Apple products. Conversions were up 40% September through March, compared to the same period a year ago.

Apple’s dividend is relatively new. So, we don’t have the kind of long-term growth we’ve seen from the other four firms. However, in the past year, dividend growth has averaged 10.4%.

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That’s a very good number, and it’s a strong bet that Apple can keep that kind of growth going for a long time, regardless of market conditions.

Tech Dividend Grower “Bonus”: TDIV

The First Trust NASDAQ Technology Dividend Index Fund (NYSE: TDIV) is a great way to play this trend with a single investment that offers broad diversification.

This exchange-traded fund (ETF) is entirely composed of technology and telecom firms. Specifically, semiconductor firms make up 28.8% of the fund, telecom firms 14.7%, software firms 14.3%, and hardware and storage 14.1%.

TDIV has more than $450 million in total net assets spread among a 98 top tech dividend payers. To be included, a stock must have a market cap of more than $500 million and have paid a dividend in the past 12 months.

Apple is TDIV’s No. 1 holding, accounting for 8.6% of the fund. Intel Corp. (Nasdaq: INTC) and Microsoft Corp. (Nasdaq: MSFT) come in at No. 2 and No. 3, and each makes up nearly 8% of the fund. Cisco Systems Inc. (Nasdaq: CSCO) and IBM Corp. (NYSE: IBM) come in at No. 3 and 4, and each also makes up about 8% of TDIV.

Besides these mega-caps, TDIV also holds a number of smaller firms, including Western Digital Corp. (Nasdaq: WDC), Intuit Inc. (Nasdaq: INTU), Garmin Ltd. (Nasdaq: GRMN), and Corning Inc. (NYSE: GLW). 

The 30-day SEC yield of this ETF is currently listed at 2.49%, and income is paid quarterly to shareholders. In addition, the expense ratio of TDIV is listed at a modest 0.5% annually, or $50 for every $10,000 invested.

Two Is Better Than One

The bottom line here is that dividend growers give us two areas of growth in a single stock: cash income and share-price appreciation.

Tech is no doubt the most dynamic sector in the marketplace today, and despite what the “big thinkers” on Wall Street would have you believe, the tech revolution is closer to its beginning than its end. And these great stocks will be there, year in and year out, driving innovation forward.

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And their dividends mean they’ll be home to the easiest money you make in stocks. And if you reinvest the dividends, you can grow your portfolio through the “magic” of compounding.

Consider this: From 1940 through 2011, dividends and dividend reinvestments accounted for more than 90% of the S&P 500’s total return during that time. Therefore, $100 invested in the S&P 500 at the end of 1940 would have been worth approximately $174,000 at the end of 2011 – assuming that all dividends were reinvested. If dividends were not included, the investment would only be worth $12,000.

These are five opportunities in fast-growing industries that pay you above-average income. And a “bonus” play that covers the new and growing Silicon Valley dividend trend.

Get in them now.

Cheers and good investing,

Michael A. Robinson

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