The Federal Reserve has stated that it will keep printing money until it has achieved its dual mandate of full employment and 2% inflation.
The Fed is nowhere near achieving either of those targets, so rates will continue to stay low for a long time — Fed Chairman Jay Powell indicated recently that timeline could be at least three years.
That’s great news for the equity markets overall but bad news for investors looking for yield because the quest for income will be difficult for a long time.
For investors with all-equity portfolios the quest for yield is even harder. All-equity portfolios should have sector diversification across the S&P 500 equity sectors, but any seasoned equity pro will tell you yield in the tech sector is virtually non-existent.
That is why investors should take a hard look at the three names I’m about to present as dividend-paying tech stocks that should be included in an income investor’s portfolio.
Own these three stocks in dividend portfolios. The dividends will grow rapidly even though the absolute yields don’t look eye-popping. The September selloff in momentum stocks primarily in the tech sector has given an attractive entry point for the tech sector.
All three of these stocks have proven to be pandemic resistant, so they will do well even if the pandemic is with us for an extended period of time.
The first is Microsoft (MSFT). The yield on Microsoft may not seem high at around 1%, but the important thing to keep in mind with dividend stocks is not only the size of the dividend but also the growth rate of the dividend.
The dividend for MSFT has quadrupled over the past 10 years and the payout ratio is only 34%, which gives the company leverage to expand the dividend.
The company is not just a behemoth like a utility that pays out dividends, however. Azure, the cloud computing system for MSFT, has recently been growing revenues at nearly twice the rate of competitor Amazon Web Services (AWS).
The second dividend-paying tech stock to consider is Apple (AAPL). As was the case with MSFT, AAPL’s dividend yield is only about 1%. However, also as with MSFT, AAPL has been a tremendous dividend grower.
Since the company reinstated the dividend eight years ago, Apple has grown dividends 116%. AAPL’s payout ratio is just 25%, so this is another company with great leverage to expand the dividend if it desires.
Meanwhile, the business is pandemic resistant. Revenues recently have grown at a 10% clip, while earnings per share (EPS) are growing at a 20% clip.
The third and final dividend paying tech stock for income investors to consider is Nvidia (NVDA). The yield is even lower for this stock than for MSFT and AAPL, but like those two other stocks the dividend growth has been tremendous, up 113% since the company initiated the dividend eight years ago.
The payout ratio with NVDA is only 12%, so this is another company with tremendous leverage to expand the dividend. The business model is actually being helped by the pandemic, as NVDA is the leader in providing graphics processing units (GPUs), which are a staple in artificial intelligence (AI) and cloud computing.
Earlier this year, revenues for the company were up 40%, and EPS were up 130%.