Longtime followers of mine know that I accumulate stocks using the market, “Take what the market gives me.”
In other words, using traditional value investing principles, I hope to take advantage of irrational weakness in individual equities, buying the highest quality stock with the most attractive margin of safety that I can find in the market at any given point in time.
Staying true to this focus on quality and value has allowed me to build a well diversified equity portfolio over time. You see, as the market ebbs and flows, different areas of the equity space drift into and out of favor. Macro headlines tend to shift the market’s sentiment from “risk-on” to “risk-off” and back again. Over the years, I’ve seen numerous isolated incidents that led to specific stock and/or industry wide weakness that allowed me to bolster blue chip positions which were negatively impacted. And moving forward, I expect to see much of the same.
Right now, the technology space is largely out of favor, due to ongoing regulatory pressure against big-tech and fears of rising interest rates which could result in lower valuation premiums (which tend to be relatively high in that sector) being applied to equities. And within the tech sector, the higher growth, more speculatively valued companies have experienced the worst of the 2022 sell-off.
Many of these names were big winners during the pandemic period, which ultimately accelerated their secular growth trends. As usual, the market got ahead of itself and bidded up the share prices of many of the most notable high growth stocks, creating a bubble that was sure to pop. And pop it has…sending many former market darling plummeting down 40%, 50%, 60%, or worse, from their recent highs.
Now, depending on one’s time horizon in the market, conviction in long-term growth trends, and overall risk tolerance, stepping in and buying some of the dips that we’re currently witnessing in the speculative growth space may end up being a wonderful idea.
Because of the fact that many of these companies trade on a price-to-sales basis and are still 5-10 years away from generating meaningful cash flows, it’s hard to tell exactly where their fair values lie. However, it is clear that the risk/reward outlook has changed for the better in recent months as share prices fall.
Generally speaking, just as the market tends to allow greed to inspire it to bid stocks up to irrationally high premiums when bullish momentum is in play, when fear takes over and the momentum shifts into a bearish stance, stocks tend to sell off to much lower levels than they deserve as well.
And frankly, when looking at the extent of many of the sell-offs that I’ve seen in the growth-tech space throughout 2022, I wouldn’t be surprised if that’s exactly what is happening right now.
I think it’s clear that a speculative growth bubble formed in 2020/2021; however, the fact is, the secular trends in areas of the market such as semiconductors, software-as-a-service (SaaS), cyber security, cloud computing, artificial intelligence, automation, virtual reality, gaming, etc, etc, etc, remain in place and therefore, I suspect that the blue chip players in these industries will continue to see strong growth moving forward.
Many investors hate the sort of volatility that we’ve seen play out in the technology sector in recent months and therefore, they prefer to avoid it all together. Obviously, without the benefit of hindsight, it’s impossible to tell when a bottom has formed. And therefore, stepping in to potentially catch falling knives in market conditions like this can be scary. And…potentially painful. But, because of the clear long-term growth trajectories in place (it’s crystal clear that the world is only becoming more and more digitalized) I believe that even the most conservative, risk averse investors should maintain exposure to this sector.
To me, avoiding technology altogether could be a grave mistake. While it’s true that the tech sector has underperformed in recent years, the fact is, over just about any other longer period of time, dating back several decades, this area of the market has generated strong alpha for shareholders.
Maintaining overweight allocation towards technology stocks has certainly helped me outperform the markets over the long-term. Doing so has helped me to grow my passive income stream in a major way as well.
Most of the biggest winners come from this area of the market. And, being that when most people think of technology stocks, they don’t think of dividends, and knowing that I manage a dividend growth portfolio, this might come as a surprise to you.
That’s exactly why I wanted to write this piece.
The fact is, you can allocate funds towards blue chip growth stocks in the technology sector and still augment your reliably increasing passive income stream.
Yes, staying true to dividend growth does mean that you’re forced to avoid many of the most exciting growth names in the market; however, after seeing the recent negative volatility that such stocks have experienced, this may end up being a good thing.
As I’ve always said, there’s nothing wrong with making money in a boring way. Slow and steady wins the race when it comes to using equities to generate wealth and reach long-term goals of a comfortable retirement.
When I think about the highest quality companies in the world, 3 names come to mind immediately: Apple (AAPL), Microsoft (MSFT), and Johnson and Johnson (JNJ).
Microsoft and Johnson and Johnson are the only 2 companies in the world with AAA-rated balance sheets. That distinction is enough in its own right to put them at the top of my pedestal. And, although Apple’s credit rating is slightly lower, at AA+ (the same as the U.S. Governments, for comparison), Apple has the world’s largest market cap, generates the biggest sales figures, cash flows, and ultimately, shareholder returns (under Tim Cook, Apple has returned hundreds of billions of dollars to shareholders), and therefore, as a dividend growth investor, this company has a special place in my heart as well.
2 of these 3 names are technology companies.
Apple began paying its dividend in 2012 and has raised it every year since. According to The Dividend Champions List, AAPL is on a 10-year dividend increase stream. The company’s 5-year dividend growth rate is 9.2%. Most recently, in April of 2021, Apple increased its dividend by 7.3% (at the time, the company’s board of directors also added an additional $90 billion to the company’s buyback authorization). Since then, Apple has posted record setting sales, earnings, and cash flow figures. During Apple’s most recent quarter, the company returned more than $27 billion to shareholders. And, AAPL ended its most recent quarter with $203 billion of cash/cash equivalents on the balance sheet, as opposed to $123 billion in long-term debt, equating to a net cash position of approximately $80 billion. Management has been adamant over the last several years that it hopes to bring that net cash position down to roughly $0.00, largely, by returning cash aggressively (and generously) to shareholders. Therefore, I expect to see another high single digit-to-low double digit raise announced in April of 2022 (alongside another enormous buyback authorization). Apple shares are up nearly 29% during the last year, and north of 393% over the last 5 years. Because of this strong share price appreciation, the company’s dividend yield is only 0.53%. But, that’s still better than 0.00%. With Apple you not only do you get exposure to one of the world’s best balance sheets, high growth tech, and disruptive innovation, but also, reliably increasing passive income.
Microsoft has an even longer dividend increase streak, at 20-years. MSFT’s 5-year dividend growth rate is 9.4%. Over the last 20-years, MSFT’s dividend growth CAGR comes in at 12.43%. Like AAPL, MSFT’s dividend yield is relatively low, coming in at just 0.86% currently. However, in a similar manner to Apple, this company has not only provided reliably increasing income over the years, but fantastic total returns. MSFT shares are up 18.11% during the last year, 345.5% during the last 5 years, and north of 821% during the last decade. Microsoft’s most recent dividend increase, declared in September of 2021, came in at 10.7%. In the Fall of 2022, I expect to see another low double digit raise from this company. MSFT’s earnings-per-share increased by 38% during fiscal 2021. Right now, analysts expect to see the company’s bottom-line grow by 17% in 2022, 15% in 2023, and 17% in 2024. MSFT ended its most recent quarter with $125.4 billion of cash/cash equivalents on its balance sheet, compared to just $48.2 billion in long-term debt. Since then, MSFT announced its attempt to buy Activision-Blizzard in an all-cash deal valued at $68.7 billion. Assuming that this deal goes through, MSFT’s cash horde will fall; however, this company generated $18.7 billion in net income last quarter and its free cash flow was $8.6 billion, so it’s reasonable to assume that MSFT’s cash pile will continue to grow long-term. The company returned $10.9 billion to shareholders during its most recent quarter. And moving forward, regardless of M&A activity, I expect to see Microsoft continue to generously provide investors strong shareholder returns.
These are probably the two most prominent blue chip technology stocks that also happen to be blue chip dividend growth companies…but there are many more.
For instance, Broadcom (AVGO) yields 2.82%, is on a 12-year dividend growth streak, and has 5 and 10-year dividend growth rates of 48.8% and 43.6%, respectively.
Qualcomm (QCOM) yields 1.62%, is on a 19-year dividend growth streak, and has 5 and 10-year dividend growth rates of 5.6% and 12.5%, respectively.
Texas Instruments (TXN) yields 2.76%, is on an 18-year dividend growth streak, and has 5 and 10-year dividend growth rates of 20.8% and 22.4%, respectively.
Cisco Systems (CSCO) yields 2.66%, is on an 11-year dividend growth streak, and has 5 and 10-year dividend growth rates of 8.2% and 23.4%, respectively.
International Business Machines (IBM) yields 5.28%, is on a 26-year dividend growth streak, and has 5 and 10-year dividend growth rates of 3.6% and 8.5%, respectively.
Intel (INTC) yields 3.24%, is on an 8-year dividend growth streak, and has 5 and 10-year dividend growth rates of 6.0% and 5.9%, respectively.
Over time, as high growth tech stocks mature, I imagine that we’ll see more and more well known names/brands front his sector being to provide investors with growing dividends. But, in the meantime, there are still plenty of attractive options available for investors looking for exposure to high growth/disruptive technology and passive income in the present.
Obviously, evaluating dividend related metrics is just a part of the total due diligence process involved with looking at technology stocks (or any equity, for that matter). If you’re looking for a more in-depth quality and valuation oriented analysis of these types of companies, please consider signing up for The Dividend Kings or The Intelligent Dividend Investor.
Of the companies mentioned in this article, Nicholas Ward is long: AAPL, MSFT, JNJ, AVGO, QCOM, TXN, CSCO, and INTC.
This article is intended to provide information to interested parties. As we have no knowledge of individual circumstances, goals and/or portfolio concentration or diversification, readers are expected to complete their own due diligence before purchasing any stocks mentioned or recommended. It does not guarantee that securities mentioned in this newsletter will produce profits or that they will equal past performance. Additionally, we are not an investment advisor and do not offer securities or tax advice. Although all content is derived from data believed to be reliable, accuracy cannot be guaranteed. Nicholas Ward, contributors and staff members of Wide Moat Research may hold positions in some or all of the stocks listed.
Nicholas Ward is a research analyst who currently writes for Seeking Alpha, The Dividend Kings, iREIT, and Forbes Real Estate Investor. Before that, he was Founder and Editor-in-Chief of The Dividend Growth Club, as well as the Income Minded Millennial. Nicholas has also contributed to Sure Dividend, Investing Daily, and The Street, where he covered stocks in Jim Cramer's Action Alerts PLUS Portfolio.
Nicholas holds a bachelor of arts from The University of Virginia, where he studied English and studio art. Prior to transitioning into the financial industry, he managed a vineyard in the foothills of the Blue Ridge Mountains.
