The Hottest New Place to Find Income in Q2/2015
Many investors believe that growth and income are mutually exclusive – that you can’t have one if you want the other. So they don’t give a second thought to high-growth sectors that haven’t traditionally paid out.
It’s one of the costliest mistakes they can make, for the simple reason that the markets change constantly. Think about it for a moment. Just because a sector hasn’t paid dividends in the past and it hasn’t been attractive to income investors, doesn’t mean that it won’t be in the future.
Take, for example, Altria Group Inc. (NYSE:MO) and CNH Industrial N.V. (NYSE:CNHI). At the time I recommended them to Money Map Report subscribers, they were considered by the broader investing community to be staid investments with very little upside – about as exciting as watching paint dry.
My take was quite different.
Despite tremendous increases in regulatory pressure, global growth concerns, and doubts related to the markets themselves, I saw two companies tapped into our Unstoppable Global Trends and, by implication, the higher revenues, higher earnings, and higher stock prices that go with them.
I knew they were getting ready to grow.
The fact that most investors took them for granted was pure gravy, because it meant that the shares were cheap compared to the potential they represented. And now anybody who followed along is glad they did. Altria and CNH Industrial have returned 245% and 142%, respectively. Now I’m seeing history getting ready to repeat itself.
As usual, I’ve identified a few companies that people don’t traditionally think of as income generators to get you started.
Here’s what you need to know.
Your Opportunity in a Sector Known for Dividend Stinginess
Tech companies have historically mustered up only meager dividend payouts – if they paid out dividends at all. Google, Tesla, Facebook, and GoPro are just a few of the famous names that pay nothing, for example. Even Apple only started to pay dividends in 2012, after a 17-year hiatus.
But the tech sector is on fire and will be for years to come – and not because they’re making gee-whiz products, either, which is how most people think about the sector.
It’s the data that matters.
According to Newstex, there were only five exabytes of data created from the dawn of time until 2003. By 2013, we were generating five exabytes of data a day.
IBM suggests that fully 75% of that is unstructured, meaning it comes from cell phones, text, voice, and video.
Perhaps 90% of all the data that has ever existed has been created in the past two years.
I realize that these are big numbers that are hard to wrap your mind around, so let me put this in perspective.
We are talking about so much data that the storage capacity involved here could capture every word ever spoken by every human who’s ever lived and still have space left over.
Here’s why this matters.
Dividends get paid by companies with three things in common: double-digit demand growth for the stuff they make, healthy profit margins, and gobs of cash.
Money always goes where it’s treated best, so it stands to reason that if you want to capture tomorrow’s massive payouts, you need only to look for the biggest cash stockpiles today.
And right now there isn’t an industry on the planet stashing more cash than tech.
As of Q4/2014, the technology sector had an average free cash flow margin of more than 26%, compared to the S&P 500 average of 11.56%. In plain English, what this means is that tech companies in general are awash in cash.
Obviously, a good deal of that is going to get plowed back into reinvestment and ongoing development – as it should.
But – and this is the “aha” moment – it’s inevitable that some of the players that have had a particularly strong earnings season will choose to boost their dividend payouts to reward shareholders immediately.
Here are three of the most likely candidates to raise their dividends in the coming weeks and months.
Dividend Contender No. 1: Apple Inc. (NasdaqGS:AAPL)
Last February, Apple CEO Tim Cook gave an interview that made every long-term Appleista jump for joy.
“By and large,” he told a crowd of investors at the Goldman Sachs Technology and Information Conference in San Francisco, “my view is that for cash we don’t need – with some level of buffer – we want to give back. We’re not hoarders.”
For a company with more than $178 billion in cash on hand according to The Guardian, Apple has plenty of latitude in determining just how far it should go in raising its dividend.
Recent history provides some indication as to how far the company’s management may decide to go. No doubt Tim Cook understands the need to keep activist investors at bay, yet still reward current shareholders.
In July 23, 2012, Apple announced a dividend payout of $3.05, which amounted to a 2% dividend yield at its pre-split stock price. But the stock has gone up in value by more than 53% since – and today its yield is 1.5%.
A return to the 2% dividend yield would boost Apple’s payouts by 33%.
The precise increase is speculation on my part – but just like investors in July 2012, you’ll want to be invested in Apple before it’s announced rather than after.
Dividend Hike Contender No. 2: SanDisk Corp. (NasdaqGS:SNDK)
In May 2014, SanDisk Corp. (NasdaqGS:SNDK), a major leader in flash storage solutions, announced plans to raise its dividend payout to $0.30/share each quarter, amounting to an increase of 30%.
“This dividend increase underscores the confidence we have in SanDisk’s business and reflects our commitment to sharing our success with our stockholders,” said Judy Bruner, the company’s executive vice president at the time.
The company is coming off a disappointing 2014, when net income decreased slightly year over year from $1.04 billion in 2013 to $1.01 billion in 2014. However, the company also has a history of rolling out pleasant surprises – beating, for example, the Zacks Consensus Estimate in three out of four trailing quarters, outperforming expectations by an average of 5.7%.
Last January, the company issued a statement declaring it was maintaining its quarterly dividend payout of $0.30/share. If SanDisk continues to surprise, that suggests it could be a very good candidate for a timely dividend hike above its current yield of 1.8%.
Dividend Hike Contender No. 3: QUALCOMM Incorporated (NasdaqGS:QCOM)
The digital communications company QUALCOMM Incorporated (NasdaqGS:QCOM) is already approaching the latest earnings season with the wind at its back. In its last four earnings reports, it’s proven analysts to be too conservative on its performance by an average of 9.5% each quarter.
Last month, it boosted its dividend payout by five cents, to $0.48/share. But I still see plenty of upside for QCOM as a dividend machine.
Not only has the company been generous with dividends in the past, but it’s raised its dividend payout no fewer than six times since early 2010. That’s enough to make it an exceptional dividend player in the tech field. The behavior is entirely consistent with “Dividend Royalty” stocks like Altria, which raised its dividend payout a “mere” four times over the same time frame!
With a 38% year-over-year increase in operating income reported last quarter, QCOM is in a position to afford even more dividend generosity. And in the meantime, the 2.9% yield it offers today is nothing to sneeze at.
Not today… and certainly not tomorrow.
Until next time,