Tech DRIPs: A Bigger Pond

08/14/2014 9:00 am EST

Focus: STOCKS

Charles Carlson

Editor, DRIP Investor

While tech has historically offered a fairly small fishing pond for dividend reinvestment plans, that fishing pond has grown in size in recent years, asserts Chuck Carlson, editor of DRIP Investor.

One reason is that there has been a big uptick in the number of technology companies that have initiated dividends over the last five years.

Investors seem drawn to the relative value old tech offers versus new tech (such as social media and “cloud” companies), where valuations seem stretched. Also, on average, old tech stocks offer higher dividend yields, which is probably drawing investor attention in this low interest rate environment.

Finally, a number of old techs are changing and adapting in ways that should help future profits and sales. Among old tech, two that stand out for their recent performance are Intel (INTC) and Microsoft (MSFT).

Intel has risen 31% this year. Couple the price appreciation with the stock’s yield of 2.7% and you get a pretty attractive total-return package for investors.

Intel will have to find a way to break out from just being a chip player in the PC market. Indeed, long-term success will depend on the ability of the company to compete in mobile (smartphones, tablets, etc.).

Still, Intel is not without plenty of financial firepower to develop products in the mobile space. The firm had roughly $23 billion in cash, trading assets, and securities at the end of the second quarter.

The stock scores well in our company’s Quadrix stock-rating system, with an Overall score of 97 (out of a possible 100).

Microsoft shares have also had a nice move this year, rising more than 19%. And, like Intel, Microsoft offers an above-average yield of 2.5%.

One catalyst for Wall Street’s newfound appreciation for these shares is the new CEO Satya Nadella, who seems willing to push and prod Microsoft in directions that the previous CEO was unwilling to go.

For example, Microsoft now makes its Office software available on Apple’s iPad device. And the CEO is moving quickly to right-size the company. Microsoft recently announced it plans to shed some 18,000 workers over the next year, the largest round of layoffs in the company’s history.

I expect these shares to continue to outpace the market for the remainder of the year, especially if the overall market trend becomes more volatile and investors migrate to large-cap, high-quality dividend payers such as Microsoft.

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