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Thursday, June 6, 2013

The Safety Net: Three "A" Rated Tech Stocks

Image representing Qualcomm as depicted in Cru...
Image via CrunchBase
By Wealthy Retirement

Los Angeles, Jun.6, stock watch .- Last week, a Wealthy Retirement reader made a great suggestion:

Let's look at some tech for a change.

Investors sometimes forget that there are quite a few tech stocks that pay healthy dividends. One of my favorite tech companies, Intel (Nasdaq: INTC), not only pays a 3.7% yield, but has been raising the dividend every year for nine years.

Qualcomm (Nasdaq: QCOM), the dominant components maker in the mobile space, has increased its dividend every year since 2002.

And Apple (Nasdaq: AAPL), which pays a 2.7% yield, has a ton of cash that could let it eventually become a Perpetual Dividend Raiser (the label given to stocks that raise their dividends each year).

Let's take a look at the dividend safety of these three tech giants.

Intel's net income and cash flow went in the wrong direction in 2012, declining by 9% and 10%, respectively. More of the same is expected in 2013 as the company invests heavily in manufacturing and research and development in an attempt to capture market share in the mobile space.

The good news is Intel's dividend not only is safe, but should continue to be raised, even while Intel works to right the ship.

Last year, the company paid out $4.35 billion in dividends, while free cash flow (cash flow from operations minus capital expenditures) was $7.86 billion. That's good for a payout ratio of 55%. If you're not familiar with the term, the payout ratio is the percentage of a firm's earnings or cash flow (I use cash flow) that is paid out in dividends.

Generally, I like to see a payout ratio below 75%. That gives me the confidence that even if the company hits a rough patch, there is still plenty of room to pay and raise the dividend.

With Intel's 55% payout ratio and its expected turnaround to begin next year, I'm not at all worried about its dividend.

Intel's Dividend Safety Rating: A

Qualcomm's dividend is in even better shape. While its yield of 2.2% is lower, there is plenty of room to raise the dividend in the future.

Over the past four quarters, Qualcomm generated $5.38 billion in free cash flow while paying out just $1.71 billion in dividends - a payout ratio of 32%.

Considering the company has raised the dividend every year for 11 years and has done so at an average 12.3% increase per year over the past five years, and the fact that earnings are expected to grow by over 20% annually through 2017, it is clear that not only is Qualcomm's dividend super safe, but I'd be stunned if it doesn't increase at a double-digit rate for the next several years.

Qualcomm's Dividend Safety Rating: A

Apple is a different story. While Qualcomm and Intel have paid dividends for over a decade, Apple only reinstated its dividend last year after a 17-year break.

In May, the company raised its quarterly dividend to $3.05 per share from $2.65.

Over the past four quarters, Apple paid out $7.4 billion in dividends against $45.4 billion in free cash flow. Keep in mind, with the fresh dividend increase, that figure will rise this year. Apple will likely pay out close to $10 billion or more in dividends.

In 2013, Apple is expected to generate $41.97 billion in free cash flow and $42.92 billion in 2014, so Apple's dividend is über safe as well.

Whether the company adopts a shareholder-friendly dividend-raising policy is unclear. But considering that it will pay out just 24% of its free cash flow this year, Apple has plenty of room to raise the dividend, even without dipping into its massive $39 billion cash hoard.

Veterans of the dot-com days of Wall Street are likely shaking their heads in disbelief at how some technology stocks have evolved into safe dividend payers. But that's exactly what has happened with some of industry's blue chips.

Apple's Dividend Safety Rating: A

As always, if you'd like me to take a look at the dividend safety of one of your stocks, please leave the ticker symbol in the comments section below.

To see if I've already written about your favorite stock, try entering the stock's name or ticker in the search box at the top right portion of our home page. I've covered many popular names.

Also, check out my new radio show, Get Rich with Dividends. You can listen online anytime. Each week I cover current market conditions and how you can get rich investing in dividend-paying stocks.

Best,
Marc Lichtenfeld
Investment Director, Wealthy Retirement

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