2 Tech Growth Plays with 5% Yields

09/26/2011 3:30 pm EST

Focus: REITS

Harry Domash

Publisher, DividendDetective and Winning Investing

These up-and-comers, a stock and a REIT, offer ways to play the biggest growth stories in technology today and still get a strong, stable yield, says Harry Domash of DividendDetective in this exclusive interview with MoneyShow.com.

When people think of technology stocks, they generally don’t think of dividends. Although lately, the big blue-chip technology names—Microsoft (MSFT), Cisco (CSCO), Intel (INTL)—have really been paying dividends, adding to them.

You have a couple of other names of somewhat less well-known companies that are growing nicely and also have dividends that are growing, right?

Yes, one I have in mind is Microchip Technology (MCHP). It’s paying about a 4.4% yield.

What do they do exactly?

They make microprocessors, which go into everything—toasters to automobiles to routers to iPhones. They are used everywhere and…

Are they based in Taiwan, or…?

They are a Silicon Valley company and they, like all semiconductor stocks, got beat up badly the last few weeks. And so Microchip, which is growing 10% to 15% a year in sales and earnings, is now paying this 4.4% dividend yield, where before was like in the threes.

Okay, and so you like them. Obviously, if there is a recession, their business is going to be hit, but are they diversified into a lot of different areas that are a little bit more recession proof?

Well, microcontrollers or microprocessors are used in a lot of different things, and even though a recession will slow their growth, they’re still going to be paying their dividends. They’re not going to cut their dividends or anything like that. Their business is still growing.

If you are a tech stock investor, you tend to focus on the growth rate. But if you’re a dividend investor, all you really need to focus on is just, is the dividend going to grow, stay the same, or be cut. If it’s going to be cut, you don’t want it.

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So, there’s another one that you like too?

Well, there is Digital Realty Trust (DLR).

Okay, and that’s a real estate investment trust?

It’s a real estate investment trust. Most REITs own property that they lease out, and most grow about 5% a year. Digital Realty Trust leases out data centers. When you hear about the cloud…

So they own these data centers and they lease them out to technology companies?

They lease them out to companies that want to put servers in these data centers.

Okay, so these are server farms essentially, and a lot of the big companies, like obviously Facebook and Google, have humongous server farms.

There are, you’re right, and also there is a trend for all companies to move their servers offsite into these data centers.

For cloud computing and things…

It’s in the cloud. The clouds live in these data centers, and Digital is a growing company. They are a major player. There is a lot of competition there, but it doesn’t matter, because no one is going to come along with a better data center.

And you don’t have to worry that Apple is going to come up with a new product that will make them obsolete, or that they’ll miss a certain product cycle or anything like that?

No.

They’re just providing the land and the area for these other companies to base their servers?

The people who make the servers have to worry about all of that, but the landlords don’t care. So we’re talking about 20% to 25% growth in dividends and earnings for the next year or two, so it’s a good dividend growth play.

What dividend are they paying out?

They’re paying 4.9% right now.

Now do they get the tax treatment that REITs do? I mean do they have to give out 95% of the…

Real estate investments trusts have to pay out 90% of their taxable earnings to shareholders.

Okay, fine. So basically this is for someone probably for a tax-advantaged account would be probably better right?

It would be, because their dividends are taxable at regular normal rates.

Okay, thank you. Now, do you own either of these two stocks?

I own both of them.

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