When companies reach a level of cash generation where they can’t find enough internally to invest, they tend to do one of two things: pay a dividend to shareholders or buy back shares of the company. . Over the past few decades, dividends have taken over stock buybacks for many companies and it has become more difficult to find dividend-paying stocks. But adding dividend-paying stocks to an investment portfolio can have a dramatic impact on long-term returns. For example, since the 1940s, dividends have accounted for 40% of total stock market return to shareholders.
It literally pays to buy and own great dividend-paying stocks. Two tech gems that have very shareholder-friendly capital return programs are HP (HPQ 0.39%) (formerly Hewlett-Packard) and Texas Instruments (TXN -0.96%). These stocks offer above-average returns and outperform the market in 2022, which can be a benefit of owning dividend-paying stocks during bear markets. Let’s find out a bit more about these two dividend-paying tech stocks.
HP has recently caught the eye as Warren Buffett Berkshire Hathaway disclosed a $3.8 billion stake in the personal computer brand for the first quarter. While HP faces near-term headwinds with declining PC sales and the shift to mobile computing and digital document services, the company’s computing and printing solutions are still widely used by many individuals and businesses around the world. This means that the company can generate stable revenue and profits each year, which are two key ingredients of a great dividend.
Over the past five years, HP has increased its dividend payouts by 70%. It currently pays an above-average dividend yield of 2.96%, which is fully funded by free cash flow. In fact, HP has returned all of its free cash flow to shareholders through stock buybacks and dividends over the past two years.
Investors who see HP as a slow-growth company past its peak would be missing out on a gem. The stock has significantly outperformed the broader market during the bear market, with HP shares down 10% year-to-date, compared to a 21% decline for the bear market. S&P500. Management is allocating capital to areas that should maintain revenue and profit margins, such as high-end gaming PCs, subscription printing services and video conferencing tools.
Analysts expect HP to hold annual revenue steady at around $66 billion over the next three years, while earnings per share slowly climb at a compound annual rate of 7.2%. These expectations make the stock’s dividend yield and low price-earnings ratio of 6 very attractive.
2. Texas Instruments
Texas Instruments isn’t just the maker of your high school calculator. The company has been around for 92 years and manufactures analog and embedded processors for a range of applications from electric toothbrushes to automotive markets.
The company’s long operating history suggests a sustainable competitive advantage at work here. TI’s strength lies in manufacturing highly specialized components at low cost, which has resulted in consistent growth over the years. Assuming shareholders chose to reinvest their dividends, they would have earned a 604% return over the past 10 years, outperforming the 239% return of the S&P 500.
The combination of good growth prospects, as industries become more computerized, and rising dividends make Texas Instruments one of the best dividend-paying stocks, period. Management directs the business to maximize long-term growth in free cash flow per share and to pay dividends to shareholders. This approach has led to 18 consecutive years of increased dividends, while free cash flow per share has grown at a compound annual rate of 12% since 2004.
No matter what the economy holds for Texas Instruments, it’s a safe bet that it will continue to push forward as it always has. Meanwhile, the stock has an attractive dividend yield of 2.95% at the time of writing, with most of its free cash flow being paid out as dividends over the past year. Simply put, you’d be hard-pressed to find a better dividend-paying tech stock than Texas Instruments.