Successful technology companies are often very profitable and generate a lot of free cash flow. This can make them excellent dividend payers, able to consistently raise the dividends they pay to shareholders. The following three stocks are industry leaders, steadily growing, and have excellent financials that equip them to continue shoveling cash to investors.
1. A technology conglomerate
Microsoft (NASDAQ:MSFT) is a name that virtually everyone has heard of. It’s a leading technology conglomerate, and one of the largest companies in the world, with a market cap of $2.2 trillion. Microsoft owns a collection of businesses, ranging from enterprise software to cloud infrastructure to consumer electronics and more.
Microsoft isn’t thought of as a “dividend stock,” especially since its yield is just 0.8%. But the company has a sneaky 19-year streak of increasing its dividend payout. The dividend has grown at an average rate of 9.5% per year over the past five years, so investors can benefit from its long-term growth, even if the starting yield isn’t very high.
Additionally, Microsoft offers one of the safest dividends of any company. Its payout consumes just 29% of its cash flow, and it’s one of the only companies in the world to have a AAA credit rating from Standard & Poor’s, higher than the U.S. government! Microsoft is poised to continue raising its dividend for the foreseeable future.
At a forward price-to-earnings (P/E) ratio of 33, Microsoft isn’t a “cheap” stock. Still, with such strong financials and earnings growth expected to hover around 15% moving forward, it’s reasonable to expect the stock to grow into its valuation over time.
2. A materials leader
On the other hand, Corning (NYSE:GLW) isn’t a name that carries nearly as much name recognition for the common investor. The company develops specialty materials such as glass and cables for display and communication applications. Its most famous product may be “Gorilla Glass,” a strong glass used on many smartphones.
Corning is putting together a solid track record as a dividend payer; the company has increased its payout over the past 11 years. Investors buying Corning will start with a dividend yield of 2.35%, and the payout has grown 12.5% each year over the past five years, a solid combination of yield and dividend growth.
Strong financials should give investors a sense of safety around the payout. The company spends just 49% of its cash flow on the dividend, leaving plenty of financial flexibility for future increases or to absorb an unexpected downturn in the business.
Corning hasn’t been a rapidly growing business. Its earnings per share have grown at 5% annually over the past five years, and it trades at a forward P/E ratio of 19. However, analysts estimate that the company will see accelerated earnings growth over the next several years, so investors should be well-positioned to see that trickle down to the dividend payout.
3. A consulting and engineering expert
Booz Allen Hamilton (NYSE:BAH) could be the most obscure name on this list, not because it’s not a quality company, but because it doesn’t deal directly with consumers. It works with government agencies and commercial organizations to provide analytics, consulting, engineering services, and more.
The company is still building its dividend growth credibility, raising its payout over the past nine years; shareholders currently get a 1.85% dividend yield to start. Booz Allen Hamilton has raised that dividend an average of 19% per year over the past five, making it the fastest-growing dividend of this group.
Just 38% of Booz Allen Hamilton’s cash flow is being spent on the dividend, which leaves a large margin for future increases, as well as some safety in case the business stumbles. The stock trades at a P/E ratio of 19, which is reasonable considering that the company is expected to grow earnings at an 8% growth rate over the next five years.
A surprising place to find dividends
Each of these companies is different from one another, yet they have some things in common, including a track record of increasing dividends, strong financials, and growing earnings faster than inflation, meaning the business is truly growing.
A consistently increasing dividend is a “back-door” indication of a quality stock, because if the company isn’t performing, there is no money to pay dividends. Long-term investors looking for potential dividend payers could do worse than starting here.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.
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