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Stocks  | September 27, 2019

As we highlighted recently, the best place to find dividend stocks could the tech sector. Need an example? Just take a look at Microsoft’s (NASDAQ:MSFT) recent wins on the shareholder rewards front. MSFT just announced that it plans on increasing its payout by 11% and is conducting a whopping $40 billion buyback program.

When you add this huge increase to its payout, Microsoft quickly becomes one of the best dividend stocks ever. In fact, MSFT raises its quarterly dividend every year since it began paying one in 2004. And MSFT isn’t alone when it comes to tech-sector dividend stocks.

Like Mr. Softy, there are countless others that have become cash flow and profit machines. With service revenues driving the show, margins in the sector have never been higher. This has only filled tech stocks coffers to the brim. With so much cash now overflowing their balance sheets, they can’t help but return it. In turn, the sector has become fertile ground for finding dividend stocks. And while initial yields may not be as high as utilities or consumer staples names, the sector can’t be beaten when it comes to dividend growth. MSFT’s big quarterly jump is a testament to that.

Which tech stocks are rewarding their shareholders just like Microsoft? Here are five dividend stocks to consider in the sector.

Microchip Technology (MCHP)

Dividend Yield: 1.62%

You may not realize it, but your coffee pot and the most complex supercomputer do have something in common with each other. They both are able to operate courtesy of semiconductors. Given that the modern world runs on this important backbone, the semiconductor sector has long been a great place to comb for tech dividend stocks. And one of the best and earliest payers in the sector could be Microchip Technology (NASDAQ:MCHP).

MCHP produces what are known as analog and microcontroller semiconductors. Truth be told, there’s nothing too special about analog chips. But if it wasn’t for these boring chips, modern society wouldn’t function. But boring is beautiful when it comes to dividends and cash flows.

As the world continues to modernize and lean on technology, demand for analog chips of all kinds have grown. That has benefited Microchip’s bottom line in a big way. Year-over-year sales clocked in 9.1% higher last quarter and over the longer term, MCHP has seen profitability for 114 consecutive quarters. That’s pretty much unheard of in the semiconductor sector which tends to have wild swings in profits and losses.

That sort of consistency has made MCHP a dividend stalwart among tech stocks. Since its initial payout in 2002, Microchip has managed to grow its dividend by 1725%.

More could be in store for investors as well. Thanks to some smart acquisitions, MCHP has started to pivot into more advanced semiconductors. Chips like automotive power units, battery and green technologies and networking semis all come with bigger margins. These could help boost its 1.62% yield much further.

Garmin (GRMN)

Dividend Yield: 2.72%

A few years ago, Garmin (NASDAQ:GRMN) was knocking on heaven’s door. Not really, but that was the perception. Thanks to the rise of smartphones, Alphabet’s (NASDAQ:GOOG, NASDAQ:GOOGL) Google Maps and other GPS applications, GRMN’s perceived main bread-and-butter in automotive navigation was dying a quick death. However, the reality is that GRMN is much more than a GPS.

The firm makes a host of marine and aviation GPS navigation equipment that is the standard for many end-users. This includes consumers and industrial applications. Meanwhile, its line of wearable devices has also become one of the standard brands for serious athletes and runners. The truth is, Garmin continues to succeed in these other markets — with the proof in the pudding. With revenues jumping 7% overall and aviation, marine, fitness and outdoor sales growing by 12% last quarter, management at GRMN have been able to raise its annual guidance for fourth consecutive year in a row.

The best part is that profits at Garmin continue to jump as these divisions come with higher profit margins. A recent pivot to include more services and reoccurring revenues hasn’t hurt either.

This has allowed Garmin to generate plenty of free cash flows. After holding onto that extra cash for a bit in order to reinvest and overcome its auto woes, GRMN is back on the dividend growth front. It never actually cut its payout, it just held it steady for a bit. With a 2.72% yield and new product launches coming down the line, GRMN stock makes a compelling stock for dividend seekers.

OpenText (OTEX)

Dividend Yield: 1.70%

Because it’s excluded from many international indexes, most ignore our neighbors in the Great White North. But Canada has long been a great place to find technology firms and dividend stocks. Take OpenText (NASDAQ:OTEX), for example.

The firm has been around for more than a decade and provides enterprise information management software and solutions. Basically, it’s digging into a firm’s data and coming up with insights into that information. Companies can use this in a variety of ways to make decisions, design new products, cut costs, etc.

The win is that OTEX’s platform is able to mine all varieties of data together — from HR and CRM to security and supply chain metrics. And thanks to the birth of cloud computing, OTEX’s services continue to be in hot demand.

The firm counts more than 74,000 customers — both big and small. And those customers continue to drive new revenues into OpenText’s coffers. Overall sales jumped by 3.8% last quarter. The real star was cloud computing revenues, gaining 10.2%. OTEX itself has started to offer plenty of cloud solutions for its own products. Because of this and the popularity of its products, in just five years annual recurring revenues have doubled.

What all of this has done is make OTEX stock a cash flow and dividend machine. Since in initiating a steady payout in 2015, OpenText has managed to grow its dividend by nearly 150%. This makes the Canadian firm a powerful dividend stock in the tech sector.

Digital Realty Trust (DLR)

Dividend Yield: 3.38%

Since it’s a real estate investment trust (REIT), having Digital Realty Trust (NYSE:DLR) on a list of tech dividend stocks may seem out of place. That is until you realize what kind of REIT DLR is. The firm owns and operates data center locations.

It doesn’t matter the technology trend — cloud computing, mobile commerce, big data, etc. — all require massive computing systems and storage. The problem is that it is awfully cost-prohibitive to buy all the necessary hardware and the specialized buildings this can require. This is where data center specialists like Digital Realty come in. DLR currently owns more than 210 of these locations across the world. Top tech firms like Facebook (NASDAQ:FB) and Uber (NASDAQ:UBER) basically rent space inside its specialized buildings to store their computers and server equipment.

It turns out this is a very profitable niche to be in. As tech has grown, so has DLR’s cash flows. Since its founding in 2005, Digital Realty has had its core funds from operations (FFO) grow by 13% per year. And as a REIT, that rising FFO number directly translates into higher dividends. DLR has managed to grow its payout every year for the last four years straight.

More growth could be on the way. DLR continues to buyout smaller and larger rivals as well as construct new data centers. However, even this isn’t enough satiate demand. That means there could many years of dividend increases still to go from this tech stock.

Broadcom (AVGO)

Dividend Yield: 3.84%

Talk about a transition. Looking at Broadcom’s (NASDAQ:AVGO) history of buyouts, spin-offs, and mergers is enough to make your head spin. This continues with its last two major deals: its acquisition of CA Technologies and its recent buyout proposal of security firm Symantec (NASDAQ:SYMC).

But the focus is the same and that’s “connecting everything.” Today, AVGO is a provider of both semiconductors and infrastructure software products. Its collection of products puts it right in the crosshairs of some big trends — this includes data center networking, home connectivity, smartphones, factory automation, broadband access, you name it. AVGO is able to provide the hardware to connect devices, dig into that connection and manage data with its CA software. If the buyout goes through, it can also protect those connections with SYMC.

It’s really becoming an all-in-one shop for other tech firms looking to build their own networks and products.

The key to all of this comes to down to licensing. While chips drive sales, both CA and SYMC have huge backlogs of steady reoccurring revenues. The integration of CA has helped Broadcom boost its bottom line as well as margins. SYMC should do the same.

Because of this and overall strong profit growth, AVGO has continued to share the wealth with shareholders. Since offering an interim dividend in 2010, Broadcom has managed to grow its payout significantly. Today, the tech stock yields 3.84%, but with the addition of SYMC, that payout should grow further down the road.

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