Many investors love the game-changing businesses of tech stocks and as a result, give up on a chance to earn passive income. As tech companies are often focused on investing heavily to grow, dividends tend to be an afterthought. Not surprisingly, there is only a small handful of tech companies that also pay dividends.
Three longtime investors did some digging to see what their favorite dividend-paying tech stock was. They came up with Microsoft (NASDAQ: MSFT), Broadcom (NASDAQ: AVGO), and Digital Realty Trust (NYSE: DLR).
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Microsoft: Strength through diversity
Danny Vena (Microsoft): One important lesson we learned from the pandemic is that there's strength in diversity. The accelerating adoption of all things digital was a boon to cloud computing businesses, while many consumer-centric businesses suffered. As the economy began to reopen, however, the reverse proved true: Investors flocked to "reopening" stocks, largely at the expense of many cloud-centric stocks. Yet through it all, Microsoft has thrived.
To give this context, since the start of the pandemic, Microsoft's market cap has ballooned from $1.4 trillion to $2.25 trillion, second only to Apple's $2.7 trillion. So why has Mr. Softy done so well, even as other companies have struggled? The wide-ranging scope of its tech businesses has acted as a buoy and helped insulate the tech giant from the wild stock price gyrations that are an everyday occurrence in the current market environment.
Microsoft is one of the leading providers of cloud computing services via its Azure Cloud, which has consistently grown more quickly than Alphabet's Google Cloud and Amazon Web Services. In the fourth calendar quarter of 2021, Azure Cloud revenue grew 46% year over year, followed by Google Cloud and AWS, which grew 45% and 40%, respectively.
Yet its cloud segment wasn't the only star performer. Over the past couple of years, the company has reported surprise contributions from LinkedIn social media, search advertising, and even Xbox gaming, helping illustrate the diversity of its business.
Speaking of gaming, I'd be remiss if I didn't mention Microsoft's upcoming acquisition of Activision Blizzard, which will further bolster the company's gaming ambitions.
In the fourth quarter, revenue of $51.7 billion grew 20% year over year, led by the intelligent cloud segment, which grew 26%, while productivity and business jumped 19% and more personal computing climbed 15%. That's an impressive performance, particularly considering the massive size of Microsoft's operations.
While growth of that magnitude might be reason enough to invest in Microsoft shares, there's also the matter of the income it provides to investors.
The company boasts a profit margin of more than 38%, and its weighty net income fuels its ever-growing dividend, which has increased by more than 200% over the past decade. Microsoft also boasts a payout ratio of just 24%, meaning this income stream will be secure even if times get tough. The dividend yield is an admittedly low 0.84%, but the stock has returned an impressive 62% over the past two years and more than 800% over the past decade -- not bad for a dividend stock.
Broadcom: The chip and software stock that is an underappreciated cash cow
Will Healy (Broadcom): Due to its business focus, Broadcom may not receive as much attention as other tech stocks. Still, investors should consider taking a closer look.
The company invests about $5 billion per year in research and development and employs engineers near its largest clients. This commitment to relationship-driven innovation has helped it create products such as the mobile hotspots that have become increasingly prevalent in smartphones. In recent years, it has also launched an enterprise software segment, a move that gives Broadcom diversification amid a cyclical chip business.
The company launched its initial public offering (IPO) in 2009 when it was still Avago Technologies, and it has risen by more than 39-fold since its $15-per-share debut. Still, its dividend has also logged impressive growth. Currently, it pays out $16.40 per share annually, a cash return of around 2.8%.
However, one factor can help Broadcom stock compete with some ultra-high-yield dividend stocks outside of tech: dividend growth. Since initiating a payout of $0.07 per share in December 2010, its board has passed massive increases every year. Consequently, investors who bought at the IPO price and held now earn a dividend return of 109%.
That payout growth continues today. In December, the dividend rose 14% when the company raised the dividend by $2 per year. Additionally, Broadcom can afford the payout. In 2021, the company generated $13.3 billion in free cash flow, easily covering the $6.2 billion in dividend costs that year.
Finally, the stock continues to log significant increases. It rose 20% over the last year and has only dropped by 13% from its high in a challenging market environment. These increases, along with its sustained dividend hikes, should preserve its status as one of the tech sector's more lucrative growth and income stocks.
Digital Realty: 16 years of increasing dividends
Brian Withers (Digital Realty): I'm a hardcore tech investor. My portfolio is entirely constructed with companies that rely on and benefit from technology. Because most early-stage growth companies are spending heavily to grow the business, they rarely sport profits, let alone have enough on the bottom line to share with investors in the form of dividends. So my portfolio has been absent dividend payers until recently. When I found about about Digital Realty Trust, a data center real estate investment trust (REIT), I was hooked.
Digital Realty builds data centers and rents them out to companies that have a massive presence in the cloud. The company's customer list is like a who's who of top tech companies, including International Business Machines, Meta Platforms, Oracle, AT&T, and many others. The company makes money from renting its space and allowing customers to benefit from the interconnections among its 287 data centers. As a REIT, it is required to pay out 90% of its net income annually to shareholders. This data center operator has paid out an increasing dividend over the past 16 years averaging 10% compound annual growth in the dividend over that time. Today, the dividend yield is an attractive 3.4%.
But this isn't just a dividend player, the company is growing its business at a slow but steady pace. You can see the most recent results in the table below. Top-line revenue grew 5%. Bookings, the measure of new business contracts signed in the quarter, grew 20% to a record $156 million. Lastly, funds from operations per share, a key metric of the financial efficiency of REITs, grew 6%.
|
Metric |
Q4 FY20 |
Q4 FY21 |
Change (YOY) |
|---|---|---|---|
|
Revenue |
$1,062 million |
$1,111 million |
5% |
|
Signed total bookings |
$130 million |
$156 million |
20% |
|
Funds from operations per share |
$1.45 |
$1.54 |
6% |
Data source: Company earnings releases. YOY = year over year.
If you are looking to get in on the cloud trend with a solid dividend player, look no further than Digital Realty. It will add some nice long-term stability to a tech-heavy portfolio without you giving up on that tech stock habit.
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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. Brian Withers owns Digital Realty Trust. Danny Vena owns Activision Blizzard, Alphabet (A shares), Amazon, Apple, Meta Platforms, Inc., and Microsoft. Will Healy has no position in any of the stocks mentioned. The Motley Fool owns and recommends Activision Blizzard, Alphabet (A shares), Amazon, Apple, Digital Realty Trust, Meta Platforms, Inc., and Microsoft. The Motley Fool recommends Alphabet (C shares) and Broadcom Ltd and recommends the following options: long March 2023 $120 calls on Apple and short March 2023 $130 calls 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.
